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Homework answers / question archive / QUESTION 1) A ‘long’ exposure to foreign exchange risk is: A
QUESTION 1)
A ‘long’ exposure to foreign exchange risk is:

A. 
a large exposure to a foreign currency 

B. 
to have significant exposure to foreign exchange risk 

C. 
an exposure to foreign liabilities 
QUESTION 2
The definition of risk includes:

A. 
the extent of dispersion around the mean. 

B. 
the possibility of a gain. 

C. 
the volatility of unexpected outcomes. 
QUESTION 3
A ‘short’ exposure to foreign exchange risk is:

A. 
to have no exposure to foreign exchange risk 

C. 
a small exposure to a foreign currency 

D. 
an exposure to foreign assets 
QUESTION 4
Which of the following is NOT a source of transaction exposure?

A. 
The purchase of a foreign asset or liability 

B. 
The expected loss of foreign market share resulting from domestic currency appreciation 

C. 
Current interest payments on a foreign currency loan 

D. 
A contract involving future foreign currency cash flows

QUESTION 5
Which of the following statements is NOT a benefit of hedging?

A. 
A more stable income may be more conducive to sales in the case of consumer durables and capital goods 

B. 
In a progressive tax environment hedging increases after tax income 

C. 
Firms which hedge are valued less than firms which do not hedge 

D. 
Volatile earnings may lead to higher employee turnover and higher wage demands 
QUESTION 6
A decision to hedge receivables in the forward market will be taken if:

A. 
the interest parity forward rate is equal to the expected spot rate 

B. 
the actual forward rate is lower than the expected spot rate 

C. 
the actual forward rate is higher than the expected spot rate 

D. 
the interest parity forward rate is lower than the expected spot rate 
QUESTION 7
An Australian company has payables of USD100,000, due in three months. The current AUD/USD exchange rate is 1.7900/1.8000. The expected exchange rate is 1.7500/1.7600 in three months’ time. The threemonth call with a strike of 1.7200 has a premium of AUD0.03.
Calculate the estimated Australian dollar value of the payables if an options hedge is taken out and the forecast turns out to be correct .

A. 
169,000 

B. 
172,000 

C. 
176,000 

D. 
175,000 
QUESTION 8
If PPP holds then:

A. 
real currency depreciation or appreciation will not occur as changes in commodity prices will be offset by changes in the nominal exchange rate so hedging will not be necessary 

B. 
the forward rate will equal the spot rate at maturity of the forward contract so hedging will not be necessary 

C. 
the foreign currency return will equal the domestic currency return and any change in the spot rate will be offset by change in the interest rate differential so hedging will not be necessary 

D. 
the spot exchange rate will not change so hedging will not be necessary 
QUESTION 9
The decision to hedge or not to hedge foreign currency exposure is a speculative decision because:

A. 
both hedging and speculation involve a deliberate assumption of risk 

B. 
the outcome of hedging depends on movements in the forward rate 

C. 
it depends on the expected movement in the exchange rate 

D. 
hedging is a profit making operation 
QUESTION 10
Which of the following instruments is NOT used for managing transaction exposure?

A. 
transfer pricing 

B. 
currency diversification 

C. 
cross hedging 

D. 
leading and lagging 
QUESTION 11
Money market hedging of payables will be preferred to forward hedging if the actual forward rate is:

A. 
higher than the expected spot rate 

B. 
higher than the expected spot rate 

C. 
higher than the interest parity forward rate 

D. 
lower than the expected spot rate 
QUESTION 12
Suppose that two counterparties, A and B, enter a threemonth forward contract on 1 January, whereby A sells USD1 million at a forward rate of AUD/USD 1.7662. On 1 March, A decides it no longer needs to sell USD1 million on 31 March, so it enters a onemonth forward contract to buy USD1 million on 31 March at a forward rate of AUD/USD 1.8000 from counterparty C.
Calculate the net cost to counterparty A, before transaction costs.

A. 
0.0338 

B. 
AUD33 800 

C. 
AUD33 800 

D. 
AUD1.8 million 
QUESTION 13
Which of the following is NOT a means whereby the default risk is controlled in futures trading?

A. 
only lowrisk participants are allowed to trade 

B. 
the clearing corporation acting as the counterparty to all contracts 

C. 
implementing daily settlement and margin requirements 

D. 
imposing daily limits on price movements 
QUESTION 14
Markingtomarket risk of futures trading arises from:

A. 
the effect of unpredictable changes in the interest rate on the margin account 

B. 
daily exchange rate volatility 

C. 
variable transaction costs 

D. 
all of the given answers

QUESTION 15
Suppose that two counterparties, A and B, enter a threemonth forward contract, whereby A sells 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 1.7000?

A. 
counterparty A 

B. 
counterparty B 

C. 
both counterparty A and counterparty B 

D. 
neither counterparty 
QUESTION 16
Consider a 3year currency swap with a notional principal of AUD100,000, whereby A receives annual payments in Australian dollars and B receives annual payments in U.S. dollars at a contracted rate of 0.9300 (USD/AUD). The market exchange (USD/AUD) rate assumes the values 0.9500, 0.9300 and 0.8900 at the end of each year.
Calculate the cash flows in year one.

A. 
B pays A USD2,000 

B. 
A pays B USD2,000 

C. 
B pays A AUD2,000 

D. 
A pays B AUD2,000 
QUESTION 17
A cross currency interest rate swap involves:

A. 
two fixed interest rates on two currencies 

B. 
a fixed interest rate on one currency and a floating interest rate on another currency 

C. 
two floating interest rates on two currencies 

D. 
two fixed or floating interest rates on two currencies, neither of which is the U.S. dollar 
QUESTION 18
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?

A. 
–USD10 000 

B. 
AUD10 000 

C. 
USD10 000 

D. 
–AUD10 000 
QUESTION 19
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.

A. 
USD10,000 

B. 
–AUD10,000 

C. 
+USD10,000 

D. 
+AUD10,000 
QUESTION 20
A long straddle position can be constructed by combining:

A. 
a long call and a long put 

B. 
a short call and a long put 

C. 
a long call and a short put 

D. 
a short call and a short put 
QUESTION 21
A trader buys a call option. 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 gross profit on expiry, assuming the exchange rate is 0.9200 at expiry.

A. 
–USD20,000 

B. 
+USD20,000 

C. 
–AUD20,000 

D. 
+AUD20,000 
QUESTION 22
An option is in the money if it:

A. 
can be exercised at net profit 

B. 
has a zero intrinsic value 

C. 
can be exercised at gross profit 

D. 
has a negative intrinsic value 
QUESTION 23
The writer of a put currency option has:

A. 
the obligation to sell a currency 

B. 
the right to sell a currency 

C. 
the right to buy a currency 

D. 
the obligation to buy a currency 
QUESTION 24
The writer of a call currency option has:

A. 
the obligation to buy a currency 

B. 
the right to sell a currency 

C. 
the right to buy a currency 

D. 
the obligation to sell a currency 
QUESTION 25
A long put position gives:

A. 
a commitment to sell a currency 

B. 
the right to buy a currency 

C. 
the right to sell a currency 

D. 
a commitment to buy a currency 



PART 2
QUESTION 1
Which of the following methods is the most widely used method for translating foreign exposures?

A. 
closing rate method 

B. 
monetary/nonmonetary method 

C. 
current/noncurrent method 

D. 
temporal method

QUESTION 2
Uncertainty differs from risk in that the former:

A. 
is not a term that is used in financial analysis. 

B. 
implies that the probability distribution of the outcome is unknown. 

C. 
implies a higher probability for bad outcomes than in the case of risk. 

D. 
pertains to the long run only. 
QUESTION 3
A firm’s economic exposure to changes in exchange rates:

A. 
can be accurately calculated in advance 

B. 
concerns contractual planned cashflows 

C. 
can be estimated from a regression equation relating changes in real cashflows to changes in the exchange rates to which they may be exposed 

D. 
none of the given answers 
QUESTION 4
According to the current/noncurrent method of translation:

A. 
current assets are translated at the current exchange rate, while longterm assets are translated at the average exchange rate 

B. 
current items are translated at the current rate, while longterm items are translated at the historical rate 

C. 
current items are translated at the closing rate, while longterm assets are translated at the average rate 

D. 
current items are translated at the average rate, while longterm items are translated at the historical rate 
QUESTION 5
A decision to hedge payables in the forward market will be taken if:

A. 
the interest parity forward rate is equal to the expected spot rate 

B. 
the interest parity forward rate is higher than the expected spot rate 

C. 
the actual forward rate is lower than the expected spot rate 

D. 
the actual forward rate is higher than the expected spot rate 
QUESTION 6
Futures hedging produces different results from those produced by forward hedging for the following reasons except:

A. 
Futures contracts involve marking to market. 

B. 
Futures contracts are traded on organised exchanges. 

C. 
Futures contracts are standardised with respect to size. 

D. 
Futures contracts are standardised with respect to the settlement date. 
QUESTION 7
Under an option hedge, the domestic currency value of payables and receivables is not known in advance because:

A. 
the outcome depends on the delta of the option 

B. 
the price of an option depends on the volatility of the underlying exchange rate 

C. 
the outcome depends on whether or not the option is exercised 

D. 
the outcome depends on the vega of the option 
QUESTION 8
An Australian company has receivables of USD100,000, due in six months. The current AUD/USD exchange rate is 1.7900/1.8000. The expected exchange rate is 1.8200/1.8300 in six months’ time. The sixmonth put with a strike of 1.8700 has a premium of AUD0.03.
Calculate the estimated Australian dollar value of the receivables if an options hedge is taken out and the forecast turns out to be correct.

A. 
AUD186,000 

B. 
AUD184,000 

C. 
AUD182,000 

D. 
AUD183,000 
QUESTION 9
Which of the following is NOT an argument why there is NO need to worry about foreign exchange risk?

A. 
Risk implies both good and bad outcomes 

B. 
Shareholders are naturally hedged through diversification 

C. 
If international parity conditions hold then foreign exchange risk will not arise 

D. 
Foreign exchange risk can be controlled if it is possible to forecast exchange rates 
QUESTION 10
An Australian company has payables of USD100,000, due in three months. The current AUD/USD exchange rate is 1.7900/1.8000, the threemonth Australian interest rate is 3.4/3.5%pa and the threemonth U.S. interest rate is 2.5/2.6%pa.
Calculate the implicit forward rate achieved via a money market hedge.

A. 
1.8450 

B. 
1.8176 

C. 
1.8045 

D. 
1.7826 
QUESTION 11
An Australian company has receivables of USD100,000, due in six months. The current AUD/USD exchange rate is 1.7900/1.8000, the sixmonth Australian interest rate is 3.4/3.5%pa and the sixmonth U.S. interest rate is 2.5/2.6%pa.
Calculate the implied forward rate achieved via a money market hedge.

A. 
1.7988 

B. 
1.8000 

C. 
1.7971 

D. 
1.8089 
QUESTION 12
In a currency swap involving A receiving euro payments and B receiving Australian dollar payments, a rise in the actual exchange rate expressed as (EUR/AUD) implies:

A. 
appreciation of the euro and a loss incurred by B 

B. 
depreciation of the Australian dollar and a loss incurred by A 

C. 
depreciation of the euro and a loss incurred by A 

D. 
appreciation of the Australian dollar and a loss incurred by B 
QUESTION 13
Suppose that a trader buys one threemonth Australian dollar future contract on 1 February at 0.5662 (USD/AUD). On successive days the following may happen as the settlement exchange rate changes (in accordance with the spot rate):
Date 
Settlement Rate 
Value of Contract 
Margin Account credit/(debit) 
2 Feb 
0.5700 
57,000 
+380 
3 Feb 
0.5815 
58,150 
+1,150 
4 Feb 
0.5750 
??? 
??? 
Calculate the value of the contract at 4^{th} February and the credit or debit to the margin account on the 4^{th} February.

A. 
57,500 and 880 

B. 
57,500 and 650 

C. 
57,500 and +650 

D. 
57,500 and +880 
QUESTION 14
In a parallel loan, the interest payments and the repayment of principal are based on:

A. 
the exchange rate prevailing when the payment is due 

B. 
an exchange rate that is agreed upon in advance 

C. 
the forward exchange rate 

D. 
the expected spot exchange rate

QUESTION 15
Suppose that two counterparties, A and B, enter a threemonth forward contract, whereby A sells 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 1.7000?

A. 
counterparty A 

B. 
counterparty B 

C. 
both counterparty A and counterparty B 

D. 
neither counterparty 
QUESTION 16
Suppose that two counterparties, A and B, enter a threemonth forward contract, whereby A sells 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?

A. 
counterparty A 

B. 
counterparty B 

C. 
both counterparty A and counterparty B 

D. 
neither counterparty 
QUESTION 17
A firm buys AUD1 million, twelve months forward at the USD/AUD exchange rate of 0.5000. The spot rate at settlement is 0.4900.
How much will the firm gain or lose on the forward contract?

A. 
–USD10 000 

B. 
USD10 000 

C. 
–AUD10 000 

D. 
AUD10 000 
QUESTION 18
Consider a 3year 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.

A. 
B pays A USD1,000 

B. 
A pays B USD1,000 

C. 
B pays A AUD1,000 

D. 
A pays B AUD1,000 
QUESTION 19
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?

A. 
He will exercise the put but not the call option 

B. 
He will exercise both options 

C. 
He will exercise the call but not the put option 

D. 
He will exercise neither option 
QUESTION 20
The holder of a put currency option has:

A. 
the right to buy a currency 

B. 
the right to sell a currency 

C. 
the obligation to buy a currency 

D. 
the obligation to sell a currency

QUESTION 21
A ‘naked’ call currency option implies that:

A. 
the option can be exercised before the expiry date 

B. 
the option cannot be exercised before the expiry date 

C. 
the writer has a spot position in the underlying currency 

D. 
the writer has no spot position in the underlying currency 
QUESTION 22
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.

A. 
–USD30,000 

B. 
Unknown without knowing the option premium 

C. 
+USD30,000 

D. 
+AUD30,000 
QUESTION 23
If an option is out of the money then its intrinsic value is:

A. 
zero 

B. 
negative 

C. 
positive 

D. 
any of the given answers 
QUESTION 24
An option is in the money if it:

A. 
has a negative intrinsic value 

B. 
can be exercised at gross profit 

C. 
has a zero intrinsic value 

D. 
can be exercised at net profit 
QUESTION 25
A short call position gives:

A. 
the right to sell a currency 

B. 
a commitment to sell a currency 

C. 
a commitment to buy a currency 

D. 
the right to buy a currency 
PART 3
QUESTION 1
Foreign exchange transaction exposure arises:
QUESTION 2
A ‘long’ exposure to foreign exchange risk is:
QUESTION 3
Which of the following is NOT a source of transaction exposure?
QUESTION 4
The volatility of the real exchange rate is close to the volatility of the nominal exchange rate because:
QUESTION 5
Money market hedging of receivables will be preferred to forward hedging if the actual forward rate is:
QUESTION 6
Which of the following instruments is NOT used for managing transaction exposure?
QUESTION 7
An Australian company has payables of USD100,000, due in three months. The current AUD/USD exchange rate is 1.7900/1.8000, the threemonth Australian interest rate is 3.4/3.5%pa and the threemonth U.S. interest rate is 2.5/2.6%pa.
Calculate the implicit forward rate achieved via a money market hedge.
QUESTION 8
An Australian company has receivables of USD100,000, due in six months. The current AUD/USD exchange rate is 1.7900/1.8000. The expected exchange rate is 1.8200/1.8300 in six months’ time. The sixmonth put with a strike of 1.8700 has a premium of AUD0.03.
Calculate the estimated Australian dollar value of the receivables if an options hedge is taken out and the forecast turns out to be correct.
.
QUESTION 9
Futures hedging produces different results from those produced by forward hedging for the following reasons except:
QUESTION 10
If the foreign currency is expected to depreciate it is better:
QUESTION 11
A decision to hedge receivables in the forward market will be taken if:
QUESTION 12
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?
QUESTION 13
Consider a 3year 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.
QUESTION 14
Consider a 3year currency swap with a notional principal of AUD100,000, whereby A receives annual payments in Australian dollars and B receives annual payments in U.S. dollars at a contracted rate of 0.9300 (USD/AUD). The market exchange (USD/AUD) rate assumes the values 0.9500, 0.9300 and 0.8900 at the end of each year.
Calculate the cash flows in year two.
QUESTION 15
Which of the following is NOT a means whereby the default risk is controlled in futures trading?
QUESTION 16
In a currency swap involving A receiving Australian dollar payments and B receiving euro payments, a rise in the actual exchange rate expressed as (EUR/AUD) implies:
QUESTION 17
Suppose that two counterparties, A and B, enter a threemonth forward contract on 1 January, whereby A sells USD1 million at a forward rate of AUD/USD 1.7662. On 1 March, A decides it no longer needs to sell USD1 million on 31 March, so it enters a onemonth forward contract to buy USD1 million on 31 March at a forward rate of AUD/USD 1.8000 from counterparty C.
Calculate the net cost to counterparty A, before transaction costs.
QUESTION 18
In a parallel loan, the interest payments and the repayment of principal are based on:
QUESTION 19
A short call position gives:
QUESTION 20
The writer of a call currency option has:
QUESTION 21
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.
QUESTION 22
A long put position gives:
QUESTION 23
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.
QUESTION 24
The writer of a put currency option has:
QUESTION 25
A long forward position can be constructed by combining:
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