Quiz 9

Assume you are a Chinese exporter and expect to receive $250,000 at the end of 60 days. You can remove the risk of loss due to a devaluation of the dollar by

Selling dollar in the 60-day forward exchange market

Assume you are an American importer who must pay 500,000 Euros at the end of 90 days when you receive 1,000 cases of French wine at your warehouse in New York. Suppose that you have not covered this transaction in the forward market. In which of the following cases will you suffer the largest loss?

The euro (spot) initially appreciates by 2 percent, and then depreciates by 1 percent

Assume you are an American importer who must pay 500,000 euros at the end of 60 days when you receive 1,000 cases of French wine at your warehouse in New York. If you do not hedge this transaction, you face exchange-rate risk. The best way to remove the risk of loss due to currency fluctuations is to

Buy 500,000 euros in the forward exchange market for delivery in 60 days.

If Canadian speculators expect the euro to appreciate against the U.S. dollar, they would

Purchase euros

If the spot price of the euro is $1.10 per euro and the 30-day forward rate is $1.00 per euro, and you believe that the spot rate in 30 days will be $1.05 per euro, then you can try to maximize speculative gains by

Signing a forward foreign exchange contract to sell dollars in 30 days

Suppose the interest rate on six-month treasury bills is 7 percent per year in the United Kingdom and 4 percent per year in the United States. Also, today’s spot exchange price of the pound is $2.00 while the six-month forward exchange price of the pound is $1.98. By investing in U.K. treasury bills rather than U.S. treasury bills and covering exchange-rate risk, U.S. investors earn an approximate extra return for six months of

0.5 percent

Suppose the interest rate on six-month treasury bills is 7 percent per year in the United
Kingdom and 4 percent per year in the United States. Also, today’s spot exchange price of the pound is $2.00 while the six-month forward exchange price of the pound is $1.98. U.S. investors expect that the future spot rate of pounds will be $2.04. By investing in U.K. treasury bills rather than U.S. treasury bills, and NOT covering exchange-rate risk, the approximate extra return that U.S. investors expect to earn for six months is

3.5 percent

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 a covered international investment?

Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated
nancial instruments, and sign a forward exchange contract to buy dollars

Blank Parity is the condition where the expected uncovered differential equals zero

Uncovered Interest

Suppose the interest rate on six-month treasury bills is 7 percent per year in the United
Kingdom and 4 percent per year in the United States. Also, today’s spot exchange price of the pound is $2.00. If the price of the six-month forward pound is _____, U.S. investors would see no return difference between covered U.K. investment and domestic U.S. investment.

$1.97