Question
Fireworks Inc. is a company in the United States that will need to pay 255,000 Singapore dollars (SGD) to its supplier in 3 months. The
Fireworks Inc. is a company in the United States that will need to pay 255,000 Singapore dollars (SGD) to its supplier in 3 months. The company wants to hedge its position with European call options that have a premium of USD 0.16 and a strike price of USD 1.05. On the date of maturity, if the spot exchange rate is USD 0.9/SGD, how much USD will the company pay if it acts rationally?
Select one:
a. 229,500
b. 43,350
c. 188,700
d. 270,300
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Question 2
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The spot exchange rate is SGD 2.1886/USD and the 1-year forward exchange rate is SGD 2.0841/USD. The interest rate in Singapore is 6.01% p.a. and the interest rate in the United states is 3.90% p.a. A trader has USD 1,400,000 (or its SGD equivalent) in hand and he can precisely forecast the spot rate in one year at SGD1.8216/USD. How much arbitrage profit or loss can the trader make from engaging in a carry trade?
Select one:
a. -SGD243,410.64
b. -USD328,551.52
c. SGD243,410.64
d. USD328,551.52
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Question 3
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Which of the following is the most likely strategy for a U.S. firm that will be receiving Swiss francs in the near future and desires to avoid exchange rate risk (assume the firm has no offsetting position in francs)?
Select one:
a. Sell franc at the spot market.
b. Purchase a call option on francs.
c. Sell a futures contract on francs.
d. Obtain a forward contract to purchase francs forward.
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Question 4
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Because there are a variety of factors in addition to inflation that affect exchange rates, this will:
Select one:
a. increase the probability the international Fisher effect will hold.
b. increase the probability that purchasing power parity will hold.
c. increase the probability the interest rate parity will hold.
d. reduce the probability that purchasing power parity will hold.
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Question 5
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The following table shows various USD forward contracts with different durations, the annualized forward premium or discount of USD for the 1-month contract is:
Select one:
a. 4.49% premium
b. 4.49% discount
c. 53.92% premium
d. 53.92% discount
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