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Questions and Answers of Financial Markets Institutions

You believe that interest rate parity and the international Fisher effect hold. Assume that the U.S. interest rate is presently much higher than the New Zealand interest rate. You have receivables of
The U.S. 3-month interest rate (unannualized)is 1 percent. The Canadian 3-month interest rate(unannualized) is 4 percent. Interest rate parity exists.The expected inflation over this period is 5
Today’s spot rate of the Mexican peso is $.10. Assume that purchasing power parity holds. The U.S. inflation rate over this year is expected to be 7 percent, while the Mexican inflation over this
The Argentine 1-year CD (deposit) rate is 13 percent, while the Mexican 1-year CD rate is 11 percent and the U.S.1-year CD rate is 6 percent. All CDs have zero default risk. Interest rate parity
Today, a U.S. dollar can be exchanged for 3 New Zealand dollars. The 1-year CD (deposit) rate in New Zealand is 7 percent, and the 1-year CD rate in the United States is 6 percent. Interest rate
The United States and the country of Rueland have the same real interest rate of 3 percent.The expected inflation over the next year is 6 percent in the United States versus 21 percent in Rueland.
The nominal (quoted) U.S. 1-year interest rate is 6 percent, while the nominal 1-year interest rate in Canada is 5 percent.Assume you believe in purchasing power parity. You believe the real 1-year
Assume the Hong Kong dollar (HK$) value is tied to the U.S. dollar and will remain tied to the U.S. dollar.Assume that interest rate parity exists. Today, an Australian dollar (A$) is worth $.50 and
Boston Co. will receive 1 million euros in 1 year from selling exports. It did not hedge this future transaction. Boston believes that the future value of the euro will be determined by purchasing
Assume that you believe purchasing power parity (PPP) exists. You expect that inflation in Canada during the next year will be 3 percent and inflation in the United States will be 8 percent. Today
Describe the exchange rate systems used by various governments,
Explain how governments can use direct intervention to influence exchange rates,
Explain how governments can use indirect intervention to influence exchange rates, and
Explain how government intervention in the foreign exchange market can affect economic conditions.
Explain why it would be virtually impossible to set an exchange rate between the Japanese yen and the U.S. dollar and to maintain a fixed exchange rate.
Assume the Federal Reserve believes that the dollar should be weakened against the Mexican peso. Explain how the Fed could use direct and indirect intervention to weaken the dollar’s value with
Briefly explain why the Federal Reserve may attempt to weaken the dollar.
Assume the country of Sluban ties its currency (the slu) to the dollar and the exchange rate will remain fixed. Sluban has frequent trade with countries in the eurozone and the United States. All
Assume that the central bank of the country Zakow periodically intervenes in the foreign exchange market to prevent large upward or downward fluctuations in its currency (the zak) against the
As of 10:00 a.m., the premium on a specific 1-year call option on British pounds is $.04. Assume that the Bank of England had not been intervening in the foreign exchange markets in the last several
Assume theHong Kong dollar (HK$) value is tied to the U.S. dollar and will remain tied to the U.S. dollar. Last month, a HK$ = 0.25 Singapore dollars. Today, a HK$ =0.30 Singapore dollars. Assume
The country of Zapakar has much international trade with the United States and other countries as it has no significant barriers on trade or capital flows. Many firms in Zapakar export common
Assume that Canada decides to peg its currency (the Canadian dollar) to the U.S. dollar and that the exchange rate will remain fixed. Assume that Canada commonly obtains its imports from the United
Blades, Inc., needs to order supplies 2 months ahead of the delivery date. It is considering an order from a Japanese supplier that requires a payment of 12.5 million yen payable as of the delivery
A call option on Canadian dollars with a strike price of $.60 is purchased by a speculator for a premium of $.06 per unit. Assume there are 50,000 units in this option contract. If the Canadian
A put option on Australian dollars with a strike price of $.80 is purchased by a speculator for a premium of $.02. If the Australian dollar’s spot rate is $.74 on the expiration date, should the
Speculating with Currency Call Options.Randy Rudecki purchased a call option on British pounds for $.02 per unit. The strike price was $1.45, and the spot rate at the time the option was exercised
Refer to the previous question, but assume that the call and put option premiums are $.02 per unit and $.015 per unit, respectively.a. Construct a contingency graph for a long euro straddle.b.
Refer to the previous question, but assume that the call and put option premiums are $.035 per unit and $.025 per unit, respectively.a. Construct a contingency graph for a long pound straddle.b.
Barry Egan is a currency speculator. Barry believes that the Japanese yen will fluctuate widely against the U.S.dollar in the coming month. Currently, 1-month call options on Japanese yen (¥) are
A call option on British pounds (£) exists with a strike price of$1.56 and a premium of $.08 per unit. Another call option on British pounds has a strike price of $1.59 and a premium of $.06 per
Two British pound (£) put options are available with exercise prices of $1.60 and $1.62. The premiums associated with these options are $.03 and $.04 per unit, respectively.a. Describe how a bull
This morning, a Canadian dollar call option contract has a$.71 strike price, a premium of $.02, and expiration date of 1 month from now. This afternoon, news about international economic conditions
Percentage Depreciation. Assume the spot rate of the British pound is $1.73. The expected spot rate one year from now is assumed to be $1.66. What percentage depreciation does this reflect?
Stetson Bank quotes a bid rate of $.784 for the Australian dollar and an ask rate of $.80. What is the bid/ask percentage spread?
Fullerton Bank quotes an ask rate of $.190 for the Peruvian currency (new sol) and a bid rate of $.188.Determine the bid/ask percentage spread.
Utah Bank’s bid price for Canadian dollars is $.7938 and its ask price is $.81. What is the bid/ask percentage spread?
Assume Poland’s currency (the zloty) is worth $.17 and the Japanese yen is worth $.008. What is the cross rate of the zloty with respect to yen? That is, how many yen equal a zloty?
As the chief financial officer of Blades, Inc., Ben Holt is pleased that his current system of exporting “Speedos”to Thailand seems to be working well. Blades’ primary customer in Thailand, a
How can the Sports Exports Company use currency futures contracts to hedge against exchange rate risk? Are there any limitations of using currency futures contracts that would prevent the Sports
How can the Sports Exports Company use currency options to hedge against exchange rate risk? Are there any limitations of using currency options contracts that would prevent the Sports Exports
Jim Logan, owner of the Sports Exports Company, is concerned that the pound may depreciate substantially over the next month, but he also believes that the pound could appreciate substantially if
Use this website to review the prevailing prices of currency futures contracts. Do today’s futures prices(for contracts with the closest settlement date) generally reflect an increase or decrease
Does it appear that futures prices among currencies(for the closest settlement date) are changing in the same direction? Explain.
If you purchase a British pound futures contract with the closest settlement date, what is the futures price? Given that a contract is based on £62,500, what is the dollar amount you will need at
Go to www.phlx.com/products and obtain the money currency option quotations for the Canadian dollar (the symbol is XCD) and the euro (symbol is XEU) for a similar expiration date. Which currency
explain how forward contracts are used to hedge based on anticipated exchange rate movements,
describe how currency futures contracts are used to speculate or hedge based on anticipated exchange rate movements, and
explain how currency options contracts are used to speculate or hedge based on anticipated exchange rate movements.
Longer-term currency options are becoming more popular for hedging exchange rate risk. Why do you think some firms decide to hedge by using other techniques instead of purchasing long-term currency
The spot rate of the New Zealand dollar is \($.70.\) A call option on New Zealand dollars with a 1-year expiration date has an exercise price of \($.71\) and a premium of \($.02.\) A put option on
You often take speculative positions in options on euros. One month ago, the spot rate of the euro was \($1.49,\) and the 1-month forward rate was \($1.50.\) At that time, you sold call options on
Forward versus Futures Contracts. Compare and contrast forward and futures contracts.
Using Currency Futures.a. How can currency futures be used by corporations?b. How can currency futures be used by speculators?
Currency Options. Differentiate between a currency call option and a currency put option.
Compute the forward discount or premium for the Mexican peso whose 90-day forward rate is \($.102\) and spot rate is \($.10.\) State whether your answer is a discount or premium.
Effects of a Forward Contract. How can a forward contract backfire?
Hedging with Currency Options. When would a U.S. firm consider purchasing a call option on euros for hedging? When would a U.S. firm consider purchasing a put option on euros for hedging?
Speculating with Currency Options. When should a speculator purchase a call option on Australian dollars? When should a speculator purchase a put option on Australian dollars?
Currency Call Option Premiums. List the factors that affect currency call option premiums and briefly explain the relationship that exists for each. Do you think an at-the-money call option in euros
Currency Put Option Premiums. List the factors that affect currency put option premiums and briefly explain the relationship that exists for each.
One year ago, you sold a put option on 100,000 euros with an expiration date of 1 year.You received a premium on the put option of \($.04\) per unit. The exercise price was \($1.22.\) Assume that 1
For the following options available on Australian dollars (A$), construct a worksheet and contingency graph for a long strangle.Locate the break-even points for this strangle. (See Appendix B in this
On July 2, the 2-month futures rate of the Mexican peso contained a 2 percent discount (unannualized).There was a call option on pesos with an exercise price that was equal to the spot rate. There
Uncertainty and Option Premiums. At 10:30 a.m., the media reported news that the Mexican government’s political problems were reduced, which reduced the expected volatility of the Mexican peso
Assume that 1 year ago, the spot rate of the British pound was$1.70. One year ago, the 1-year futures contract of the British pound exhibited a discount of 6 percent. At that time, you sold futures
Aggregate Effects on Exchange Rates.Assume that the United States invests heavily in government and corporate securities of Country K. In addition, residents of Country K invest heavily in the United
Speculation. Diamond Bank expects that the Singapore dollar will depreciate against the U.S.dollar from its spot rate of $.43 to $.42 in 60 days.The following interbank lending and borrowing rates
Briefly describe how various economic factors can affect the equilibrium exchange rate of the Japanese yen’s value with respect to that of the dollar.
A recent shift in the interest rate differential between the United States and Country A had a large effect on the value of Currency A. However, the same shift in the interest rate differential
Smart Banking Corp. can borrow $5 million at 6 percent annualized. It can use the proceeds to invest in Canadian dollars at 9 percent annualized over a six-day period. The Canadian dollar is worth
Assume that the U.S. inflation rate becomes high relative to Canadian inflation. Other things being equal, how should this affect the (a) U.S. demand for Canadian dollars, (b) supply of Canadian
Assume U.S. interest rates fall relative to British interest rates. Other things being equal, how should this affect the (a) U.S. demand for British pounds, (b) supply of pounds for sale, and (c)
Assume that the U.S. income level rises at a much higher rate than does the Canadian income level. Other things being equal, how should this affect the (a) U.S. demand for Canadian dollars, (b)
Assume that the Japanese government relaxes its controls on imports by Japanese companies. Other things being equal, how should this affect the (a) U.S. demand for Japanese yen, (b) supply of yen for
The terrorist attacks on the United States on September 11, 2001, were expected to weaken U.S. economic conditions and reduce U.S. interest rates. How do you think the weaker U.S.economic conditions
Measuring Effects on Exchange Rates. Tarheel Co. plans to determine how changes in U.S. and Mexican real interest rates will affect the value of the U.S.dollar. (See Appendix C for the basics of
Factors Affecting Exchange Rates. Mexico tends to have much higher inflation than the United States and also much higher interest rates than the United States. Inflation and interest rates are much
Speculation. Blue Demon Bank expects that the Mexican peso will depreciate against the dollar from its spot rate of $.15 to $.14 in 10 days. The following interbank lending and borrowing rates
Relative Importance of Factors Affecting Exchange Rate Risk. Assume that the level of capital flows between the United States and the country of Krendo is negligible (close to zero) and will continue
You reside in the United States and are planning to make a one-year investment in Germany during the next year. Since the investment is denominated in euros, you want to forecast how the euro’s
How Factors Affect Exchange Rates. The country of Luta has large capital flows with the United States. It has no trade with the United States and will not have trade with the United States in the
Kurnick Co. expects that the pound will depreciate from \($1.70\) to \($1.68\) in one year. It has no money to invest, but it could borrow money to invest. A bank allows it to borrow either 1 million
Assume that inflation is zero in the United States and in Europe and will remain at zero. United States interest rates are presently the same as in Europe. Assume that the economic growth for the
Because the Sports Exports Company (a U.S. firm)receives payments in British pounds every month and converts those pounds into dollars, it needs to closely monitor the value of the British pound in
Click on the section “Foreign Exchange Rates–monthly.” Use this Web page to determine how exchange rates of various currencies have changed in recent months. Note that most of these
Does it appear that the Asian currencies move in the same direction relative to the dollar? Does it appear that the Latin American currencies move in the same direction against the dollar?Explain.
Go to www.oanda.com/convert/fxhistory. Obtain the direct exchange rate ($ per currency unit) of the Canadian dollar for the beginning of each of the last 12 months. Insert this information in a
Briefly explain how MNCs can make use of each international financial market.
If the direct exchange rate of the euro is worth $1.25, what is the indirect rate of the euro? That is, what is the value of a dollar in euros?
Explain how the Asian crisis would have affected the returns to a U.S. firm investing in the Asian stock markets as a means of international diversification.
Foreign Stock Markets. Explain why firms may issue stock in foreign markets. Why might U.S. firms issue more stock in Europe since the conversion to the euro in 1999?
Today, the stock price of Genevo Co. (based in Switzerland) is priced at SF80 per share.The spot rate of the Swiss franc (SF) is $.70. During the next year, you expect that the stock price of Genevo
Go to the currency converter at http://finance.yahoo.com/currency and determine the bid-ask spread for the euro. Then determine the bid-ask spread for a currency in a less developed country. What do
Bloomington Co. is a large U.S.-based MNC with large subsidiaries in Germany. It has issued stock in Germany in order to establish its business. It could have issued stock in the United States and
As a financial analyst for Blades, Inc., you are reasonably satisfied with Blades’ current setup of exporting“Speedos” (roller blades) to Thailand. Due to the unique arrangement with Blades’
Each month, the Sports Exports Company (a U.S. firm)receives an order for footballs from a British sporting goods distributor. The monthly payment for the footballs is denominated in British pounds,
Go to the Yahoo site for exchange rate data (http://finance.yahoo.com/currency).a. What is the prevailing direct exchange rate of the Japanese yen?b. What is the prevailing direct exchange rate of
Go to the section on currencies within the website.First, identify the direct exchange rates of foreign currencies from the U.S. perspective. Then, identify the indirect exchange rates. What is the
Use the Bloomberg website to determine the cross exchange rate between the Japanese yen and the Australian dollar. That is, determine how many yen must be converted to an Australian dollar for

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