QUESTION 24 FOREX MARKETS. You are evaluating investments in U.S. equities and Mexican equities. Your stock analysts anticipate that U.S. equities will appreciate 9% over the next year. The Mexican equities are expected to rise 15%. Your foreign exchange analyst expects the exchange rate for Mexican pesos, MP, to change from $.14286/MP to $.142015/MP. What rate of return do you expect to earn on the Mexican equities?

A. 9%

B. 14.25%

C. 14.32%

D. 15%

E. None of the above

QUESTION 25 FUTURES MARKET. Unlike options contracts, futures contracts represent

A. an obligation to buy or sell the underlying asset

B. an obligation to buy but not to sell

C. a right but not an obligation to buy or sell

D. a right to sell but not to buy the underlying asset

E. a, b, c

QUESTION 16 FOREX MARKETS. Since the terms of the forward contract are well known before the facts, would a covered interest arbitrage offer a more superior investment outcome than investing in U.S. securities? Ignore transaction costs and taxes.

A. No, because interest rate parity does not hold

B. Yes, because the future value of the foreign investment is greater after currency conversion

C. Yes, because interest rate parity would prevail

D. No, because the future value of the domestic investment is greater

E. None of the above

QUESTION 17 FOREX MARKETS. What forward rate would cause you to be indifferent between investing your money in U.S. securities versus investing in S.A.? Note that at this forward rate, interest rate parity holds.

A. R 7.2390

B. R 7.0341

C. R 6.8019

D. None of the above

QUESTION 18 FOREX MARKETS. Based on the preceding hedged transaction, did the interest rate parity hold?

A. No, a loss is realized on the hedging transaction

B. Yes, a gain is realized on the hedging transaction

C. No, a gain is realized on the hedging transaction

D. Yes, a loss is realized on the hedging transaction

E. Yes, neither a gain nor a loss is realized on the hedging transaction

QUESTION 19 FOREX MARKETS. Which of the following strategies would be most profitable if you expect the dollar to depreciate against the South African rand?

A. Invest your funds in S.A.

B. Keep your funds in the U.S.

C. Execute a covered interest arbitrage at the current forward rate

D. None of the above