FIN 340 Midterm Exam Questions
and Correct Answers
Which of the following events would most likely result in an appreciation of the U.S.
dollar?
a. U.S. inflation is very high.
b. The Fed indicates that it will raise U.S. interest rates.
c. Future U.S. interest rates are expected to decline.
d. Japan is expected to increase interest rates in the near future - Answer- b. The Fed
indicates that it will raise U.S. interest rates.
Under purchasing power parity, the future spot exchange rate is a function of the initial
spot rate in equilibrium and: - Answer- The inflation differential
According to the international Fisher effect, if investors in all countries require the same
real rate of return, the differential in nominal interest rates between any two countries: -
Answer- Is due to their inflation differentials
Which of the following theories suggests that the percentage difference between the
forward rate and the spot rate depends on the interest rate differential between two
countries?
a. purchasing power parity (PPP).
b. triangular arbitrage.
c. international Fisher effect (IFE).
d. interest rate parity (IRP). - Answer- Interest rate parity (IRP)
A U.S. firm is bidding for a project needed by the Swiss government. The firm will not
know if the bid is accepted until three months from now. The firm will need Swiss francs
to cover expenses but will be paid by the Swiss government in dollars if it is hired for the
project. The firm can best insulate itself against exchange rate exposure by: - Answer-
Buying franc call options
A firm wants to use an option to hedge 12.5 million in receivables from New Zealand
firms. The premium is $.03. The exercise price is $.55. If the option is exercised, what is
the total amount of dollars received (after accounting for the premium paid)? - Answer-
(12.5 mil *. 55)- (12.5 mil *.03)
6500000
The greater the variability of a currency, the ____ will be the premium of a call option on
this currency, and the ____ will be the premium of a put option on this currency, other
things equal. - Answer- greater; greater
, You purchase a call option on pounds for a premium of $.03 per unit, with an exercise
price of $1.64; the option will not be exercised until the expiration date, if at all. If the
spot rate on the expiration date is $1.65, your net profit per unit is: - Answer- 1.65-1.64-
.03= -.02
Macomb Corporation is a U.S. firm that invoices some of its exports in Japanese yen. If
it expects the yen to weaken, it could ____ to hedge the exchange rate risk on those
exports. - Answer- Buy yen put options
Kalons, Inc. is a U.S.-based MNC that frequently imports raw materials from Canada.
Kalons is
typically invoiced for these goods in Canadian dollars and is concerned that the
Canadian dollar
will appreciate in the near future. Which of the following is not an appropriate hedging
technique under these circumstances?
a. purchase Canadian dollars forward.
b. purchase Canadian dollar futures contracts.
c. purchase Canadian dollar put options.
d. purchase Canadian dollar call options. - Answer- c. purchase Canadian dollar put
options.
Graylon, Inc., based in Washington, exports products to a German firm and will receive
payment
of €200,000 in three months. On June 1, the spot rate of the euro was $1.12, and the 3-
month
forward rate was $1.10. On June 1, Graylon negotiated a forward contract with a bank
to sell
€200,000 forward in three months. The spot rate of the euro on September 1 is $1.15.
Graylon
will receive $____ for the euros. - Answer- 220000
The one-year forward rate of the British pound is quoted at $1.60, and the spot rate of
the
British pound is quoted at $1.63. The forward ____ is ____ percent. - Answer- discount;
1.8
If your firm expects the euro to substantially depreciate, it could speculate by ____ euro
call
options or ____ euros forward in the forward exchange market. - Answer- selling; selling
The shorter the time to the expiration date for a currency, the ____ will be the premium
of a call option, and the ____ will be the premium of a put option, other things equal. -
Answer- lower; lower
and Correct Answers
Which of the following events would most likely result in an appreciation of the U.S.
dollar?
a. U.S. inflation is very high.
b. The Fed indicates that it will raise U.S. interest rates.
c. Future U.S. interest rates are expected to decline.
d. Japan is expected to increase interest rates in the near future - Answer- b. The Fed
indicates that it will raise U.S. interest rates.
Under purchasing power parity, the future spot exchange rate is a function of the initial
spot rate in equilibrium and: - Answer- The inflation differential
According to the international Fisher effect, if investors in all countries require the same
real rate of return, the differential in nominal interest rates between any two countries: -
Answer- Is due to their inflation differentials
Which of the following theories suggests that the percentage difference between the
forward rate and the spot rate depends on the interest rate differential between two
countries?
a. purchasing power parity (PPP).
b. triangular arbitrage.
c. international Fisher effect (IFE).
d. interest rate parity (IRP). - Answer- Interest rate parity (IRP)
A U.S. firm is bidding for a project needed by the Swiss government. The firm will not
know if the bid is accepted until three months from now. The firm will need Swiss francs
to cover expenses but will be paid by the Swiss government in dollars if it is hired for the
project. The firm can best insulate itself against exchange rate exposure by: - Answer-
Buying franc call options
A firm wants to use an option to hedge 12.5 million in receivables from New Zealand
firms. The premium is $.03. The exercise price is $.55. If the option is exercised, what is
the total amount of dollars received (after accounting for the premium paid)? - Answer-
(12.5 mil *. 55)- (12.5 mil *.03)
6500000
The greater the variability of a currency, the ____ will be the premium of a call option on
this currency, and the ____ will be the premium of a put option on this currency, other
things equal. - Answer- greater; greater
, You purchase a call option on pounds for a premium of $.03 per unit, with an exercise
price of $1.64; the option will not be exercised until the expiration date, if at all. If the
spot rate on the expiration date is $1.65, your net profit per unit is: - Answer- 1.65-1.64-
.03= -.02
Macomb Corporation is a U.S. firm that invoices some of its exports in Japanese yen. If
it expects the yen to weaken, it could ____ to hedge the exchange rate risk on those
exports. - Answer- Buy yen put options
Kalons, Inc. is a U.S.-based MNC that frequently imports raw materials from Canada.
Kalons is
typically invoiced for these goods in Canadian dollars and is concerned that the
Canadian dollar
will appreciate in the near future. Which of the following is not an appropriate hedging
technique under these circumstances?
a. purchase Canadian dollars forward.
b. purchase Canadian dollar futures contracts.
c. purchase Canadian dollar put options.
d. purchase Canadian dollar call options. - Answer- c. purchase Canadian dollar put
options.
Graylon, Inc., based in Washington, exports products to a German firm and will receive
payment
of €200,000 in three months. On June 1, the spot rate of the euro was $1.12, and the 3-
month
forward rate was $1.10. On June 1, Graylon negotiated a forward contract with a bank
to sell
€200,000 forward in three months. The spot rate of the euro on September 1 is $1.15.
Graylon
will receive $____ for the euros. - Answer- 220000
The one-year forward rate of the British pound is quoted at $1.60, and the spot rate of
the
British pound is quoted at $1.63. The forward ____ is ____ percent. - Answer- discount;
1.8
If your firm expects the euro to substantially depreciate, it could speculate by ____ euro
call
options or ____ euros forward in the forward exchange market. - Answer- selling; selling
The shorter the time to the expiration date for a currency, the ____ will be the premium
of a call option, and the ____ will be the premium of a put option, other things equal. -
Answer- lower; lower
