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Dr. Amit, Professional w/Adv. Degree

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Suppose that the pound is pegged to gold at £20 per ounce and

Resolved Question:

Suppose that the pound is pegged to gold at £20 per ounce and the dollar is pegged to gold at $35 per ounce. This implies an exchange rate of $1.75 per pound. If the current market exchange rate is $1.80 per pound, how would you take advantage of this situation? Hint: assume that you have $350 available for investment

a) Start with $350. Buy 10 ounces of gold with dollars at $35 per ounce. Convert the gold to £200 at £20 per ounce. Exchange the £200 for dollars at the current rate of $1.80 per pound to get $360.

b) Start with $350. Exchange the dollars for pounds at the current rate of $1.80 per pound. Buy gold with pounds at £20 per ounce. Convert the gold to dollars at $35 per ounce.

c) a) and b) both work

d) None of the above

The €/$ spot exchange rate is $1.50/€ and the 90-day forward premium is 10 percent. Find the 90-day forward price.

a) $1.65/€

b) $1.5375/€

c) $1.9125/€

d) None of the above

The current spot exchange rate is $1.55/€ and the three-month forward rate is $1.50/€. You enter into a short position on €1,000. At maturity, the spot exchange rate is $1.60/€. How much have you made or lost?

a) Lost $100

b) Made €100

c) Lost $50

d) Made $150

The current spot exchange rate is $1.55/€ and the three-month forward rate is $1.50/€. Based on your analysis of the exchange rate, you are confident that the spot exchange rate will be $1.62/€ in three months. Assume that you would like to buy or sell €1,000,000. What actions do you need to take to speculate in the forward market? What is the expected dollar profit from speculation

a) Sell €1,000,000 forward for $1.50/€.

b) Buy €1,000,000 forward for $1.50/€.

c) Wait three months, if your forecast is correct buy €1,000,000 at $1.52/€.

d) Buy €1,000,000 today at $1.55/€; wait three months, if your forecast is correct sell €1,000,000 at $1.62/€. You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00. If a bank quotes you a cross rate of £1.00 = €1.20 how much money can an astute trader make?

a) No arbitrage is possible

b) $1,160,000

c) $41,667

d) $40,000 The current exchange rate is €1.00 = $1.50. Compute the correct balances in Bank A's correspondent account(s) with bank B if a currency trader employed at Bank A buys €100,000 from a currency trader at bank B for $150,000 using its correspondent relationship with Bank B.

a) Bank A's dollar-denominated account at B will fall by $150,000.

b) Bank B's dollar-denominated account at A will fall by $150,000.

c) Bank A's pound-denominated account at B will fall by €100,000.

d) Bank B's pound-denominated account at A will rise by €100,000. Find the no-arbitrage cross exchange rate. The dollar-euro exchange rate is quoted as $1.60 = €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00

a) €1.25/£1.00

b) $1.25/£1.00

c) £1.25/€1.00

d) €0.80/£1.00 If the annual inflation rate is 5.5 percent in the United States and 4 percent in the U.K., and the dollar depreciated against the pound by 3 percent, then the real exchange rate, assuming that PPP initially held, is

a) 0.07

b) 0.9849

c) -0.0198

d) 4.5 Suppose that the one-year interest rate is 3.0 percent in the Italy, the spot exchange rate is $1.20/€, and the one-year forward exchange rate is $1.18/€. What must one-year interest rate be in the United States?

a) 1.2833%

b) 1.0128%

c) 4.75%

d) None of the above The current spot exchange rate is $1.55 = €1.00 and the three-month forward rate is $1.60 = €1.00. Consider a three-month American call option on €62,500 with a strike price of $1.50 = €1.00. If you pay an option premium of $5,000 to buy this call, at what exchange rate will you break-even?

a) $1.58 = €1.00

b) $1.62 = €1.00

c) $1.50 = €1.00

d) $1.68 = €1.00 From the perspective of the writer of a put option written on €62,500. If the strike price is $1.55/€, and the option premium is $1,875, at what exchange rate do you start to lose money?

a) $1.52/€

b) $1.55/€

c) $1.58/€

d) None of the above Today's settlement price on a Chicago Mercantile Exchange (CME) Yen futures contract is $0.8011/¥100. Your margin account currently has a balance of $2,000. The next three days' settlement prices are $0.8057/¥100, $0.7996/¥100, and $0.7985/¥100. (The contractual size of one CME Yen contract is ¥12,500,000). If you have a long position in one futures contract, the changes in the margin account from daily marking-to-market, will result in the balance of the margin account after the third day to be

a) $1,425.

b) $1,675.

c) $2,000.

d) $3,425 The current spot exchange rate is $1.55 = €1.00; the three-month U.S. dollar interest rate is 2%. Consider a three-month American call option on €62,500 with a strike price of $1.50 = €1.00. What is the least that this option should sell for?

a) $0.05×62,500 = $3,125

b) $3,125/1.02 = $3,063.73

c) $0.00

d) none of the above The current exchange rate is €1.25 = £1.00 and a British firm offers a French customer the choice of paying a £10,000 bill due in 90 days with either £10,000 or €12,500.

a) The seller has given the buyer an at-the-money put option.

b) The seller has given the buyer an at-the-money call option.

c) Both a) and b) are correct

d) None of the above XYZ Corporation, located in the United States, has an accounts payable obligation of ¥750 million payable in one year to a bank in Tokyo. The current spot rate is ¥116/$1.00 and the one year forward rate is ¥109/$1.00. The annual interest rate is 3 percent in Japan and 6 percent in the United States. XYZ can also buy a one-year call option on yen at the strike price of $0.0086 per yen for a premium of 0.012 cent per yen. The future dollar cost of meeting this obligation using the forward hedge is

a) $6,450,000.

b) $6,545,400.

c) $6,653,833.

d) $6,880,734. Suppose that the exchange rate is €1.25 = £1.00. Options (calls and puts) are available on the Philadelphia exchange in units of €10,000 with strike prices of $1.60/€1.00. Options (calls and puts) are available on the Philadelphia exchange in units of £10,000 with strike prices of $2.00/£1.00. For a U.S. firm to hedge a €100,000 payable,

a) buy 10 call options on the euro with a strike in dollars.

b) buy 8 put options on the pound with a strike in dollars.

c) sell 10 call options on the euro with a strike in dollars.

d) sell 8 put options on the pound with a strike in dollars.

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