FIN 565 Week 4 Midterm Exam

1. Question: (TCOA) Which is an example of direct foreign investment? 2. Question: (TCOA) Which would likely have the least direct influence on a country's current account? 3. Question: (TCOF) As a result of the Smiths onian Agreement, the U.S. dollar was 4. Question: (TCOC)A large increase in the income level in Mexico along with no growth in the U.S. income level is normally expected to cause (assuming no change in interest rates or other factors)a(n) in Mexican demand for U.S. goods, and the Mexican peso should . 5. Question: (TCOC) If last week the British pound was worth $1.62 and this week is worth $1.60, it has against the U.S. dollar by . 6. Question: (TCOD)A firm wants to buy an option to hedge 12.5 million in receivables from New Zealand firms. The premium is $0.03. The exercise price is $0.55.If the option is exercised, what is the total amount of dollars received (after deducting the premium paid to purchase the option)? 7. Question: (TCOB) Assume the annual U.S. interest rate is 4%, where as the Euro zone’s interest rate is 5%. According to , the euro should by . 8. Question: (TCOD) A GInc., based in Washington, exports products to an Italian firm and will receive payment of €100,000 in 3 months. On June1, the spot rate of the euro was $1.40,and the3-month forward rate was $1.42. On June1, A G negotiated forward contract with a bank to sell €100,000 forward in 3 months. The spot rate of thee uro on September1is$1.45.AGwillreceive$ for thee uros. 9. Question: (TCO A) Answer the following questions regarding U.S. international trade. A What would be the underlying reason for the strong demand for U.S. exports?(10points) B How may the existence of the euro affect U.S. international trade?(10points) 10. Question: (TCO B) Assume the following situation. 11. Question: (TCOF) Following terrorist attacks in the United States on September 11,2001, the valuations of many MNCs declined by more than10%. Explain why the expected cash flows of the MNCs were reduced, even if they were not directly hit by the terrorist attacks. 12. Question: (TCO D) Answer the following questions regarding speculating with currency futures. Assume that a March futures contract on the Mexican peso was available in January for $0.09 per unit. Also assume that forward contracts were available for the same settlement date at a price of $0.092 per peso. A. How could speculators capitalize on this situation, assuming zero transaction costs? (10points) B. How would such speculative activity affect the difference between the forward contract price and the futures price? Explain.(10points) 13. Question: (TCO C) Answer the following questions regarding the effects of indirect intervention. Suppose that the government of Chile reduces one if its key interest rates. The values of several other Latin American currencies are expected to change substantially against the Chilean peso in response to the news. Why could other Latin American currencies be affected by a cut in Chile's interest rates? (10points) How would the central banks of other Latin American countries likely adjust their interest rates? How would the currencies of these countries respond to the central bank intervention? (10points) 14. Question: (TCO B) Answer the following questions regarding covered interest arbitrage in both directions. Assume that the existing U.S. 1-year interest rate is 10% and the Canadian1-year interest rate is 11%. Also assume that interest rate parity exists. Should the forward rate of the Canadian dollar exhibit a discount or a premium? (10points) If a U.S. investor attempts CIA, what will be his or her return? If a Canadian investor attempts CIA, what will be his or her return?(10points)