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Exam 16: Foreign Exchange Derivative Markets

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Question 1

Multiple Choice

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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.

E) C) and D)
F) All of the above

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Question 2

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A speculator who expects a foreign currency to appreciate could purchase the currency forward and, when received, sell it in the spot market.

A) True
B) False

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Question 3

Multiple Choice

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Bank A asks $.555 for Swiss francs and Banks B and C are willing to pay $.557 for francs. An institution could capitalize on these differences by engaging in

The speculative risk of purchasing a ____ is that the foreign currency value ____ over time.

Which of the following is most likely to provide currency forward contracts to their customers?

A system whereby one currency is maintained within specified boundaries of another currency or unit of account is a

The pegged exchange rate system is no longer used by any countries.

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 country that pegs its currency is still able to maintain complete control over its local interest rates.

In the Wall Street Journal, you observe that the British pound (£) is quoted for $1.65. The Australian dollar (A$) is quoted for $0.60. What is the value of the Australian dollar in British pounds?

If a commercial bank expects the euro to appreciate against the dollar, it may take a ____ position in euros and a ____ position in dollars.

If the forward rate of a foreign currency ____ the existing spot rate, the forward rate will exhibit a ____.

The indirect exchange rate specifies the value of the currency in U.S. dollars.

____ forecasting is usually based on either the spot rate or the forward rate.

The supply and demand for a currency are influenced by all of the following, except

Assume the following information. $\bullet$ Interest rate on borrowed euros is 5 percent annualized $\bullet$ Interest rate on dollars loaned out is 6 percent annualized $\bullet$ Spot rate for €0.83 per dollar (one € = $1.20) $\bullet$ Expected spot rate in five days is €0.85 per dollar $\bullet$ 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?

The Smithsonian Agreement allowed for a devaluation of the dollar and for a widening of the boundaries within which currencies were allowed to fluctuate.

In reality, exchange rates do not always change as suggested by purchasing power parity.

Exchange rates usually change precisely as suggested by the purchasing power parity (PPP) theory.

A(n) ____ in the supply of euros for sale will cause the euro to ____.