404 Chapter 16 Foreign Exchange Derivative Markets Chapter 16 Foreign Exchange Derivative Markets 1 At any given point in time the price at which banks will buy a currency is the price at which they sell it A higher than B lower than C the same as D none of these ANSWER B 2 Which of the following is most likely to provide currency forward contracts to their customers A commercial banks B international mutual funds C brokerage firms D insurance companies ANSWER A 3 The allowed for the devaluation of the dollar in 1971 A Bretton Woods Agreement B Louvre Accord C Smithsonian Agreement D none of these ANSWER C 4 The Bretton Woods Era was the era A of free floating exchange rates B of floating rates without boundaries but subject to government intervention C in which governments maintained exchange rates within 1 percent of a specified rate D in which exchange rates were maintained within 10 percent of a specified rate ANSWER C 5 A system whereby exchange rates are market determined without boundaries but subject to government intervention is called A a dirty float B a free float C the gold standard D none of these ANSWER A 405 Chapter 16 Foreign Exchange Derivative Markets 6 A system whereby one currency is maintained within specified boundaries of another currency or unit of account is a A pegged system B free float C dirty float D managed float ANSWER A 7 A n in the supply of euros for sale will cause the euro to A increase appreciate B increase depreciate C decrease depreciate D none of these ANSWER B 8 Purchasing power parity suggests that the exchange rate will on average change by a percentage that reflects the differential between two countries A income B interest rate C inflation D tax ANSWER C 9 If U S interest rates suddenly become much higher than European interest rates the U S demand for euros would and the supply of euros to be exchanged for dollars would other factors held constant A increase increase B increase decrease C decrease increase D decrease decrease ANSWER C 10 Assume interest rate parity exists If the spot rate on the British pound is 2 and the 1 year British interest rate is 7 percent and the 1 year U S interest rate is 11 percent what is the pound s forward discount or premium A 3 74 percent premium B 3 74 percent discount C 3 60 percent premium D 3 60 percent discount ANSWER A Chapter 16 Foreign Exchange Derivative Markets 406 11 When a government influences factors such as inflation interest rates or income in order to affect currency s value this is an example of A direct intervention B indirect intervention C a freely floating system D a pegged system ANSWER B 12 Which of the following statements is incorrect A Central banks often consider adjusting a currency s value to influence economic conditions B If the U S central bank wishes to stimulate the economy it could weaken the dollar C A weaker dollar could cause U S inflation by reducing foreign competition D Direct intervention occurs when the central bank influences the factors that determine the dollar s value ANSWER D 13 If the U S government imposed trade restrictions on U S imports this would the U S demand for foreign currencies and would place pressure on the values of foreign currencies with respect to the dollar A increase upward B increase downward C limit upward D limit downward ANSWER D 14 If a commercial bank expects the euro to appreciate against the dollar it may take a position in euros and a position in dollars A short short B long short C short long D long long ANSWER B 15 forecasting involves the use of historical exchange rate data to predict future values A Technical B Fundamental C Market based D Mixed ANSWER A 407 Chapter 16 Foreign Exchange Derivative Markets 16 forecasting is usually based on either the spot rate or the forward rate A Technical B Fundamental C Market based D Mixed ANSWER C 17 Which of the following is not a method of forecasting exchange rate volatility A using the volatility of historical exchange rate movements B using a time series of volatility patterns in previous periods C using the volatility of future exchange rate movements D using the exchange rate s implied standard deviation ANSWER C 18 Assume the following information Interest rate on borrowed euros is 5 percent annualized Interest rate on dollars loaned out is 6 percent annualized Spot rate for 0 83 per dollar one 1 20 Expected spot rate in five days is 0 85 per dollar Alonso Bank can borrow 10 million What is the euro profit to Alonso Bank over the five day period from shorting euros and going long on dollars A 200 311 11 B 207 111 11 C 201 555 56 D none of these ANSWER C 19 Which of the following statements is incorrect A Forward contracts are contracts typically negotiated with a commercial bank that allow the purchase or sale of a specified amount of a particular foreign currency at a specified exchange rate on a specified future date B The forward market is located in New York City C Many of the commercial banks that offer foreign exchange on a spot basis also offer forward transactions for the widely traded currencies D Forward contracts can hedge a corporation s risk that a currency s value may appreciate over time ANSWER B Chapter 16 Foreign Exchange Derivative Markets 408 20 If the spot rate of the British pound is 2 and the 180 day forward rate is 2 05 what is the annualized premium or discount A 2 5 percent discount B 2 5 percent premium C 10 percent premium D 5 percent discount E 5 percent premium ANSWER E 21 Currency futures contracts differ from forward contracts in that they A are an obligation B are not an obligation C are standardized D can specify any amount and maturity date ANSWER C 22 If the spot rate the exercise price a currency option would not be exercised A remains below call B remains below put C remains above put D none of these ANSWER A 23 If a firm planning to hedge receivables is certain of the future direction a spot rate will move and requires a tailor made hedge in terms of amount and maturity date it should use a contract A call options B futures C forward D put options ANSWER C 24 Assume that a British pound put option has a premium of 03 per unit and an exercise price of 1 60 The present spot rate is 1 61 The expected future spot rate on the expiration date is 1 52 The option will be exercised on this date if at all What is the expected per unit net gain or loss resulting from purchasing the put option A 01 loss B 09 loss C 09 gain D 05 gain ANSWER D 409