Arizona State University ECN 306 1)You are an American and usually transact in dollars

Arizona State University

ECN 306

1)You are an American and usually transact in dollars. If the only foreign currency position that you have is that you owe 10,000 Swiss francs for a custom watch that you ordered from Swatch:

•             you are exposed to exchange rate risk because you are long in Swiss francs.

•             you will suffer a loss if, in the spot exchange market, the Swiss franc depreciates against the

U.S. dollar.

•             you can hedge against exchange rate risk by borrowing Swiss francs and immediately exchanging them for dollars.

•             you can hedge against exchange rate risk by obtaining a forward foreign exchange contract

in which you will receive Swiss francs.

2. Large Company is a candy manufacturer and one of the ingredients that it uses is cocoa. It is deeply concerned with the market price fluctuations of cocoa. To protect this, it enters into a contract that would allow the company to buy cocoa at a specific price at a given future date. This is an example of:

•             hedging.

•             speculation.

•             investment.

•             profit maximization.

3. A bank that is active in the Eurocurrency market will:

•             accept interest-paying deposits only in euros.

•             accept interest-paying deposits in a number of different currencies.

•             loan money only within the European Union.

•             loan money only if the loans are denominated in euros.

4. If a person's or firm's financial welfare can be affected by changes in the value of one currency in terms of another currency, that person or firm is exposed to a(n) risk.

•             exchange rate

•             forward exchange rate

•             debit

•             credit

5. When the exchange rate at which an anticipated foreign investment return will be redeemed is determined through a forward exchange contract, a(n)          results.

•             uncovered interest parity

•             covered interest parity

•             uncovered international investment

•             covered international investment

6. A        contract allows someone to establish the price today at which he or she will buy a foreign currency at a specified future date.

•             speculative

•             currency futures

•             spot

•             currency swap

7. For an investor who starts with dollars and wants to end up with dollars in the future, which of the following choices is an example of an uncovered international investment?

•             Sell dollars at the spot rate, invest the proceeds in foreign currency–denominated financial instruments, and sign a forward exchange contract to buy the foreign currency.

•             Sell dollars at the spot rate, invest the proceeds in foreign currency–denominated financial

instruments, and then buy dollars at the future spot rate.

•             Buy a dollar-denominated financial asset.

•             Sell dollars at the spot rate, invest the proceeds in foreign currency–denominated financial instruments, and sign a forward exchange contract to buy the foreign currency.

8. The difference between the current forward exchange rate value of a currency and its current spot exchange rate value is identified as the:

•             forward premium.

•             swap rate.

•             arbitrage point.

•             covered interest differential.

9.            is buying a country's currency spot and selling it forward, while making a profit on the combination of the interest rate in that country and any forward premium on its currency.

•             Covered interest arbitrage

•             Hedged forward exchange

•             Anticipated future spot exchange

•             Forward premium speculation

10. If Peruvian speculators expect the euro to appreciate against the U.S. dollar, they would:

•             purchase Peruvian sol.

•             purchase U.S. dollars.

•             purchase euros.

•             use Peruvian sol to buy euros, instantly use the euros to buy U.S. dollars, and then instantly use the U.S. dollars to buy Peruvian sol.