MB214 Tutorial 4: Foreign Exchange Market
Questions
1. A U.S. investor has borrowed pounds, converted them to dollars and invested the dollars in the U.S. to take advantage of interest rate differentials. To cover the currency risk the investor should
A) Sell pounds forward
B) Buy dollars forward
C) Buy pounds forward
D) Sell pounds spot
E) None of the above
2. A U.S. bank borrowed dollars, converted them to euros and invested in euro denominated CDs to take advantage of interest rate differentials. To cover the currency risk the investor should
A) Sell dollars forward
B) Sell euros forward
C) Buy euros forward
D) Sell euros spot
E) None of the above
3. A U.S. firm has £50 million in assets in Britain which they need to repatriate in 6 months. They could hedge the exchange rate risk by
A) Buying pounds forward
B) Selling pounds forward
C) Borrowing pounds
D) Both B and C would hedge the risk
E) Both A and C would hedge the risk
4. A U.S. bank converted $1 million to Swiss francs to make a Swiss franc loan to a valued corporate customer when the exchange rate was 1.5 francs per dollar. The borrower agreed to repay the principle plus 5% interest in 1 year. The borrower repaid Swiss francs at loan maturity and when the loan was repaid the exchange rate was 1.4 francs per dollar. What was the bank's dollar rate of return?
A) 6.00%
B) -11.67%
C) 7.14%
D) -2.00%
E) 12.50%
5. A Japanese investor can earn a 1% annual interest rate in Japan or about 4% per year in the U.S. If the spot exchange rate is 115 yen to the dollar at what one year forward rate would an investor be indifferent between the U.S. and Japanese investments?
A) ¥110.58
B) ¥116.15
C) ¥111.68
D) ¥118.42
E)...