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international financial management

Questions and Answers of International Financial Management

Differences among Forward Rates Assume that the 30-day forward premium of the euro is –1 percent, while the 90-day forward premium of the euro is 2 percent. Explain the likely interest rate
Economic Effects on the Forward Rate Assume that Mexico’s economy has expanded significantly, causing a high demand for loanable funds there by local firms. How might these conditions affect the
Covered Interest Arbitrage in Both Directions The following information is available:■ You have $500,000 to invest.■ The current spot rate of the Moroccan dirham is$.110.■ The 60-day forward
Deriving the Forward Rate Assume that annual interest rates in the United States are 4 percent, while interest rates in France are 6 percent.a. According to IRP, what should the forward rate premium
Covered Interest Arbitrage The South African rand has a 1-year forward premium of 2 percent.One-year interest rates in the United States are 3 percentage points higher than in South Africa.Based on
Covered Interest Arbitrage in Both Directions Assume that the annual U.S. interest rate is currently 8 percent and Germany’s annual interest rate is currently 9 percent. The euro’s 1-year forward
Limitations of Covered Interest Arbitrage Assume that the 1-year U.S. interest rate is 11 percent, while the 1-year interest rate in Malaysia is 40 percent.Assume that a U.S. bank is willing to
Covered Interest Arbitrage in Both Directions The 1-year interest rate in New Zealand is 6 percent. The 1-year U.S. interest rate is 10 percent.The spot rate of the New Zealand dollar (NZ$) is
Interest Rate Parity If the relationship that is specified by interest rate parity does not exist at any period but does exist on average, then covered interest arbitrage should not be considered by
Changes in Forward Premiums Assume that the forward rate premium of the euro was higher last month than it is today. What does this imply about interest rate differentials between the United States
Changes in Forward Premiums Assume that the Japanese yen’s forward rate currently exhibits a premium of 6 percent and that interest rate parity exists. If U.S. interest rates decrease, how must
Interest Rate Parity Consider investors who invest in either U.S. or British 1-year Treasury bills.Assume zero transaction costs and no taxes.a. If interest rate parity exists, then the return for
Interest Rate Parity Why would U.S. investors consider covered interest arbitrage in France when the interest rate on euros in France is lower than the U.S.interest rate?
Covered Interest Arbitrage in Both Directions Assume that the existing U.S. 1-year interest rate is 10 percent and the Canadian 1-year interest rate is 11 percent. Also assume that interest rate
Inflation Effects on the Forward Rate Why do you think currencies of countries with high inflation rates tend to have forward discounts?
Interest Rate Parity Explain the concept of interest rate parity. Provide the rationale for its possible existence.
Effects of September 11 The terrorist attack on the United States on September 11, 2001, caused expectations of a weaker U.S. economy. Explain how such expectations could have affected U.S.interest
Covered Interest Arbitrage Assume the following information:Spot rate of Mexican peso = $.100 180-day forward rate of Mexican peso= $.098 180-day Mexican interest rate = 6%180-day U.S. interest rate
Covered Interest Arbitrage Assume the following information:Spot rate of Canadian dollar = $.80 90-day forward rate of Canadian dollar= $.79 90-day Canadian interest rate = 4%90-day U.S. interest
Covered Interest Arbitrage Explain the concept of covered interest arbitrage and the scenario necessary for it to be plausible.
Triangular Arbitrage Assume the following information:QUOTED PRICE Value of Canadian dollar in U.S.dollars$.90 Value of New Zealand dollar in U.S. dollars$.30 Value of Canadian dollar in New Zealand
Triangular Arbitrage Explain the concept of triangular arbitrage and the scenario necessary for it to be plausible.
Locational Arbitrage Assume the following in formation:BEAL BANK YARDLEY BANK Bid price of New Zealand dollar$.401 $.398 Ask price of New Zealand dollar$.404 $.400 Given this information, is
Locational Arbitrage Explain the concept of locational arbitrage and the scenario necessary for it to be plausible.
Pegged Exchange Rates The United States, Argentina, and Canada commonly engage in international trade with each other. All the products traded can easily be produced in all three countries.The traded
Intervention and Pegged Exchange Rates Interest rate parity exists and will continue to exist.The 1-year interest rates in the United States and in the eurozone is 6 percent and will continue to be 6
Impact of Devaluation The inflation rate in Yinland was 14 percent last year. The government of Yinland just devalued its currency (the yin) by 40 percent against the dollar. Even though it produces
Pegged Currency and International Trade Assume that Canada decides to peg its currency (the Canadian dollar) to the U.S. dollar and that the exchange rate will remain fixed. Assume that Canada
Implications of a Revised Peg The country of Zapakar has much international trade with the United States and other countries as it has no significant barriers on trade or capital flows. Many firms in
Pegged Currency and International Trade Assume the Hong Kong dollar (HK$) 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
Speculating Based on Intervention Assume that you expect that the European Central Bank (ECB)plans to engage in central bank intervention in which it plans to use euros to purchase a substantial
Impact of Information on Currency Option Premiums 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
Impact of Intervention on Currency Option Premiums Assume that the central bank of the country Zakow periodically intervenes in the foreign exchange market to prevent large upward or downward
Pegged Currencies Why do you think a country suddenly decides to peg its currency to the dollar or some other currency? When a currency is unable to maintain the peg, what do you think are the
Intervention Effects on Corporate Performance Assume you have a subsidiary in Australia. The subsidiary sells mobile homes to local consumers in Australia, who buy the homes using mostly borrowed
Effects of September 11 Within a few days after the September 11, 2001, terrorist attack on the United States, the Federal Reserve reduced short-term interest rates to stimulate the U.S. economy. How
Monitoring of the Fed’s Intervention Why do foreign market participants attempt to monitor the Fed’s direct intervention efforts? How does the Fed attempt to hide its intervention actions? The
Indirect Intervention During the Asian crisis, some Asian central banks raised their interest rates to prevent their currencies from weakening. Yet, the currencies weakened anyway. Offer your opinion
Freely Floating Exchange Rates Should the governments of Asian countries allow their currencies to float freely? What would be the advantages of letting their currencies float freely? What would be
Effects of Indirect Intervention Suppose that the government of Chile reduces one of its key interest rates. The values of several other Latin American currencies are expected to change substantially
Sterilized Intervention Explain the difference between sterilized and nonsterilized intervention.
Direct Intervention in Europe If most countries in Europe experience a recession, how might the European Central Bank use direct intervention to stimulate economic growth?
Intervention Effects on Bond Prices U.S. bond prices are normally inversely related to U.S. inflation. If the Fed planned to use intervention to weaken the dollar, how might bond prices be affected?
Effects on Currencies Tied to the Dollar The Hong Kong dollar’s value is tied to the U.S. dollar.Explain how the following trade patterns would be affected by the appreciation of the Japanese yen
Indirect Intervention Why would the Fed’s indirect intervention have a stronger impact on some currencies than others? Why would a central bank’s indirect intervention have a stronger impact than
Feedback Effects Explain the potential feedback effects of a currency’s changing value on inflation.
Currency Effects on Economy What is the impact of a weak home currency on the home economy, other things being equal? What is the impact of a strong home currency on the home economy, other things
Intervention Effects Assume there is concern that the United States may experience a recession. How should the Federal Reserve influence the dollar to prevent a recession? How might U.S. exporters
Indirect Intervention How can a central bank use indirect intervention to change the value of a currency?
Direct Intervention How can a central bank use direct intervention to change the value of a currency?Explain why a central bank may desire to smooth exchange rate movements of its currency
Intervention with Euros Assume that Belgium, one of the European countries that uses the euro as its currency, would prefer that its currency depreciate against the U.S. dollar. Can it apply central
Exchange Rate Systems Compare and contrast the fixed, freely floating, and managed float exchange rate systems. What are some advantages and disadvantages of a freely floating exchange rate system
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
Briefly explain why the Federal Reserve may attempt to weaken the dollar.
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
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.
Speculating with Currency Options The spot rate of the New Zealand dollar is $.77. A call option on New Zealand dollars with a 1-year expiration date has an exercise price of $.78 and a premium of
Speculating with Currency Futures Assume that 1 year ago, the spot rate of the British pound was $1.70. One year ago, the 1-year futures contract of the British pound exhibited a discount of 6
Uncertainty and Option Premiums At 10:30 a.m., the media reported news that the Mexican government’s political problems were reduced, which reduced the expected volatility of the Mexican peso
Uncertainty and Option Premiums This morning, a Canadian dollar call option contract has a$.71 strike price, a premium of $.02, and expiration date of 1 month from now. This afternoon, news about
Profits from Using Currency Options and Futures 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
Bull Spreads and Bear Spreads 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,
Currency Bull Spreads and Bear Spreads A call option on British pounds (£) exists with a strike price of $1.56 and a premium of $.08 per unit. Another call option on British pounds has a strike
Speculating with Currency Options Barry Egan is a currency speculator. Barry believes that the Japanese yen will fluctuate widely against the U.S. dollar in the coming month. Currently, 1-month call
Currency Strangles For the following options available on Australian dollars (A$), construct a worksheet and contingency graph for a long strangle.Locate the break-even points for this strangle.(See
Currency Strangles The following information is currently available for Canadian dollar (C$) options(see Appendix B in this chapter):■ Put option exercise price = $.75.■ Put option premium =
Currency Straddles Refer to the previous question, but assume that the call and put option premiums are $.035 per unit and $.025 per unit, respectively. (See Appendix B in this chapter.)a. Construct
Currency Strangles (See Appendix B in this chapter.) Assume the following options are currently available for British pounds (£):■ Call option premium on British pounds = $.04 per unit.■ Put
Speculating with Currency Straddles Maggie Hawthorne is a currency speculator. She has noticed that recently the euro has appreciated substantially against the U.S. dollar. The current exchange rate
Currency Option Contingency Graphs (See Appendix B in this chapter.) The current spot rate of the Singapore dollar (S$) is $.50. The following option information is available:■ Call option premium
Currency Straddles Refer to the previous question, but assume that the call and put option premiums are $.02 per unit and $.015 per unit, respectively. (See Appendix B in this chapter.)a. Construct a
Currency Straddles Reska, Inc., has constructed a long euro straddle. A call option on euros with an exercise price of $1.10 has a premium of $.025 per unit.A euro put option has a premium of $.017
Impact of Information on Currency Futures and Options Prices Myrtle Beach Co. purchases imports that have a price of 400,000 Singapore dollars, and it has to pay for the imports in 90 days. It can
Estimating Profits from Currency Futures and Options 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.
Risk of Currency Futures Currency futures markets are commonly used as a means of capitalizing on shifts in currency values, because the value of a futures contract tends to move in line with the
Hedging with Currency Derivatives A U.S.professional football team plans to play an exhibition game in the United Kingdom next year. Assume that all expenses will be paid by the British government,
Speculating with Currency Put Options Bulldog, Inc., has sold Australian dollar put options at a premium of $.01 per unit, and an exercise price of$.76 per unit. It has forecasted the Australian
Speculating with Currency Call Options Bama Corp. has sold British pound call options for speculative purposes. The option premium was $.06 per unit, and the exercise price was $1.58. Bama will
Speculating with Currency Put Options.Auburn Co. has purchased Canadian dollar put options for speculative purposes. Each option was purchased for a premium of $.02 per unit, with an exercise price
Speculating with Currency Call Options LSU Corp. purchased Canadian dollar call options for speculative purposes. If these options are exercised, LSU will immediately sell the Canadian dollars in the
Speculating with Currency Futures Assume that a March futures contract on Mexican pesos was available in January for $.09 per unit. Also assume that forward contracts were available for the same
Price Movements of Currency Futures Assume that on November 1, the spot rate of the British pound was $1.58 and the price on a December futures contract was $1.59. Assume that the pound depreciated
Hedging with Currency Derivatives Assume that the transactions listed in the first column of the table below are anticipated by U.S. firms that have no other foreign transactions. Place an “X” in
Speculating with Currency Futures Assume that the euro’s spot rate has moved in cycles over time.How might you try to use futures contracts on euros to capitalize on this tendency? How could you
Forward versus Currency Option Contracts What are the advantages and disadvantages to a U.S. corporation that uses currency options on euros rather than a forward contract on euros to hedge its
Selling Currency Put Options Brian Tull sold a put option on Canadian dollars for $.03 per unit.The strike price was $.75, and the spot rate at the time the option was exercised was $.72. Assume
Selling Currency Call Options Mike Suerth sold a call option on Canadian dollars for $.01 per unit. The strike price was $.76, and the spot rate at the time the option was exercised was $.82. Assume
Speculating with Currency Put Options Alice Duever purchased a put option on British pounds for$.04 per unit. The strike price was $1.80, and the spot rate at the time the pound option was exercised
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
Currency Put Option Premiums List the factors that affect currency put option premiums and briefly explain the relationship that exists for each.
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
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?
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?
Effects of a Forward Contract How can a forward contract backfire?
Forward Premium 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.
Currency Options Differentiate between a currency call option and a currency put option.
Using Currency Futuresa. How can currency futures be used by corporations?b. How can currency futures be used by speculators?
Forward versus Futures Contracts Compare and contrast forward and futures contracts.
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 euros at
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 New Zealand

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