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Homework answers / question archive / Topic 5 1)An exchange rate is said to follow a random walk when:   2A rise in the domestic inflation rate and a simultaneous fall in the foreign inflation rate lead to:   3Some countries have high interest rates and depreciating currencies because:         4A rise in the domestic and foreign growth rates leads to:     5The government can affect the exchange rate by:   6Which of the following is NOT an argument for central bank intervention?   7Expectations affect the exchange rate because:   8A speculative attack on a currency is triggered when:   9‘News’ as used in the exchange rate literature refers to:   10If the domestic currency price of a commodity is greater than the domestic currency equivalent of the foreign price of the same commodity, then the derivation of PPP implies that:     11Which of the following assumptions is NOT compatible with PPP in its strict form? * 12At the beginning of 2002 the AUD/USD exchange rate was 1

Topic 5 1)An exchange rate is said to follow a random walk when:   2A rise in the domestic inflation rate and a simultaneous fall in the foreign inflation rate lead to:   3Some countries have high interest rates and depreciating currencies because:         4A rise in the domestic and foreign growth rates leads to:     5The government can affect the exchange rate by:   6Which of the following is NOT an argument for central bank intervention?   7Expectations affect the exchange rate because:   8A speculative attack on a currency is triggered when:   9‘News’ as used in the exchange rate literature refers to:   10If the domestic currency price of a commodity is greater than the domestic currency equivalent of the foreign price of the same commodity, then the derivation of PPP implies that:     11Which of the following assumptions is NOT compatible with PPP in its strict form? * 12At the beginning of 2002 the AUD/USD exchange rate was 1

Economics

Topic 5

1)An exchange rate is said to follow a random walk when:

 

2A rise in the domestic inflation rate and a simultaneous fall in the foreign inflation rate lead to:

 

3Some countries have high interest rates and depreciating currencies because:

 

 

 

 

4A rise in the domestic and foreign growth rates leads to:

 

 

5The government can affect the exchange rate by:

 

6Which of the following is NOT an argument for central bank intervention?

 

7Expectations affect the exchange rate because:

 

8A speculative attack on a currency is triggered when:

 

9‘News’ as used in the exchange rate literature refers to:

 

10If the domestic currency price of a commodity is greater than the domestic currency equivalent of the foreign price of the same commodity, then the derivation of PPP implies that:  

 

11Which of the following assumptions is NOT compatible with PPP in its strict form? *

12At the beginning of 2002 the AUD/USD exchange rate was 1.9585 and the 2002 inflation rates were 3.10% for Australia and 2.33% for the US. What should the USD/AUD exchange rate have been at the end of 2002, according to PPP theory?

 

13Which of the following may be taken in support of the PPP hypothesis? *

 

14At the beginning of 2003 the AUD/USD exchange rate was 1.7662. At the same time, the forecast change in the AUD/USD in 2003 was 2.00% and the forecast inflation rate for the US in 2003 was 1.50%. What should be the forecast inflation rate for Australia in 2003, according to PPP theory? *

 

 

 

 

15Which of the following statements is consistent with the monetary model of exchange rate determination? *

 

16The presence of the bid-offer spread in foreign exchange transactions: *

 

17Assuming the exchange rate is measured in direct quotation and that a PPP trading rule is adopted, if the actual exchange rate is higher than the PPP rate, then: *

 

           

 

 

 

18Assuming the exchange rate is measured in direct quotation and that a PPP trading rule is adopted, if the actual exchange rate is lower than the PPP rate, then: *

 

 

19According to the monetary model of exchange rates, a fall in national real income will lead to: *

             

 

20. If PPP holds precisely, then the real exchange rate will be: *

 

 

 

 

 

 

 

Topic 6

21. Which of the following statements is or are correct? *

 

 

 

22. You are given the following exchange rate quotes in the markets identified in Table 6.1. Calculate the Australian dollar profit, if any, on a two-point arbitrage. *

 

 

 

 

 

 

 

23. You are given the following exchange rate quotes in Sydney. Calculate the US dollar profit, if any, on a three-point arbitrage. *

 

24. If the foreign currency equivalent of the domestic price of a commodity is less than the foreign price of the same commodity, then the LOP implies that: *

 

 

 

 

 

25. If the interest rate differential and the forward spread are positive and the interest differential is lower than the spread then: *

 

26. Under which of the following conditions will outward arbitrage be triggered? *

 

27. Inward covered arbitrage does not cause: *

 

 

 

28. You are given the information in Table 6.3. Calculate the precise outward covered margin from a U.S. perspective. *

 

29. The demand for forward contracts by arbitragers depends on the difference between: *

 

 

 

 

 

30. The demand for forward contracts by forward speculators depends on the difference between: *

 

 

 

31. You are given the following information. If CIP holds, what should be the AUD/USD three-month forward exchange rate, according to the approximate CIP formula? *

 

 

 

 

 

 

 

32. You are given the following information. Calculate the precise outward covered margin from an Australian perspective. *

 

33. Which of the following conditions will NOT trigger outward uncovered arbitrage? *

 

 

 

 

34. Under which of these conditions will inward uncovered arbitrage be profitable? *

 

 

 

35. You are given the following information. If UIP holds, what should the AUD/USD exchange rate be in six months time, according to the approximate UIP formula? *

 

 

 

 

 

36. You are given the following information. Calculate the precise outward uncovered margin from an Australian perspective. *

 

37. You are given the following information. Calculate the approximate inward uncovered margin from an Australian perspective. *

 

 

 

 

38. Which of the following does NOT represent the UIP equilibrium condition? *

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Topic 7

39. Suppose that two counterparties, A and B, enter a three-month forward contract, whereby A buys USD1 million at a forward rate of AUD/USD 1.7662. Which party is likely to default if the spot rate three months hence is 1.8000? *

 

40.Which of the following is NOT a means whereby the default risk is controlled in futures trading? *

41. A firm buys AUD1 million, twelve months forward at the USD/AUD exchange rate of 0.5000. The spot rate at settlement is 0.5100. How much will the firm gain or lose on the forward contract? *

 

 

42. Futures contracts can circumvent the problematic features of forward contracts except the problem that they: *

 

43. In a currency swap, the interest payments and repayment of the principal are based on: *

 

44. Consider a 3-year interest rate swap with a notional principal of AUD100,000, whereby A receives annual payments based on a floating interest rate and B receives annual payments based on a fixed rate of 5%pa. The floating interest rates on each payment date assume the values 6%, 5% and 4%. Calculate the cash flows in year three. *

 

 

 

 

45. A cross currency interest rate swap involves: *

 

46. The writer of a call currency option has: *

 

47. If the spot exchange rate is greater than the exercise exchange rate, then: *

 

 

 

 

 

48. A short call position gives: *

 

49. A long forward position can be constructed by combining: *

 

50. The higher the exercise rate: *

 

 

 

 

 

 

51. An Australian company has payables of USD100,000, due in three months. The current spot AUD/USD exchange rate is 1.7900/1.8000. The current three-month forward AUD/USD exchange rate is 1.7400/1.7500. The expected AUD/USD exchange rate is 1.7500/1.7600 in three months time. Calculate the profit or loss you would expect to make on a forward hedge. *

 

52. If the foreign currency is expected to depreciate it is better: *

 

53. Receivables may be hedged by: *

 

 

 

 

54. Futures hedging produces different results from those produced by forward hedging for the following reasons except: *

 

55. Money market hedging of receivables will be preferred to forward hedging if the actual forward rate is: *

 

56. Forward hedging of payables will be preferred to money market hedging if the actual forward rate is: *

 

 

 

 

 

57. A decision to hedge payables in the forward market will be taken if: *

 

58. If UIP holds then: *

 

 

 

 

 

 

 

 

 

 

 

Topic 8

59. The holder of a call currency option has: *

 

60. The writer of a put currency option has: *

 

61. A trader buys a call and a put option. The call option gives him the right to buy AUD1 million at an exercise exchange rate of 0.9000 (USD/AUD), whereas the put option gives him the right to sell AUD1 million at the same exercise exchange rate. If the exchange rate at expiry is 0.8500, will the trader exercise the options? *

 

 

 

62. A trader sells a put option. The put option requires him to buy AUD1 million at an exercise exchange rate of 0.9000 (USD/AUD). Calculate the trader’s gross profit on expiry, assuming the exchange rate is 0.9300 at expiry. *

 

63. A trader buys a call option at a premium of USD0.01. The call option gives him the right to buy AUD1 million at an exercise exchange rate of 0.9000 (USD/AUD). Calculate the trader’s net profit on expiry, assuming the exchange rate is 0.9200 at expiry. *

 

64. A trader sells a put option at a premium of USD0.02. The put option requires him to buy AUD1 million at an exercise exchange rate of 0.9000 (USD/AUD). Calculate the trader’s net profit on expiry, assuming the exchange rate is 0.9300 at expiry. *

 

 

 

65. A trader buys a call at a premium of USD0.02 and a put option at a premium of USD0.01. The call option gives him the right to buy AUD1 million at an exercise exchange rate of 0.9000 (USD/AUD), whereas the put option gives him the right to sell AUD1 million at the same exercise exchange rate. Calculate the trader’s net profit on expiry, assuming the exchange rate is 0.9500 at expiry. *

 

66. On the expiry date of a European call currency option, the holder: *

 

67. On the expiry date of a European call currency option, the writer: *

 

 

 

 

68. A short call position gives: *

 

69. An American option is an option that *

 

70. A European option is an option that *

 

 

 

 

 

 

 

71. If an option is out of the money then its intrinsic value is: *

 

72. A long forward position can be constructed by combining: *

 

73. A trader replicates a long forward position using put and call options. The options’ strike is 0.9000 (USD/AUD) and both their premiums are USD0.02. Calculate the net payoff of the position if the spot exchange rate at expiry is 0.9300. *

 

 

 

 

 

74. A long straddle position can be constructed by combining *

 

75. A long strangle is similar to a long straddle except that *

 

76. The longer the time to expiry: *

 

 

 

 

 

 

 

77. The higher the interest rate on the currency of purchase *

 

78. The higher the exchange rate volatility:

 

 

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