Strayer University ITB400 QUIZ 3

As of today, the spot exchange rate is €1.00 = $1.25 and the rates of inflation expected to prevail for the next year in the U.S. is 2% and 3% in the euro zone. What is the one-year forward rate that should prevail? Answer

· Question 2

3 out of 3 points

	As of today, the spot exchange rate is €1.00 = $1.60 and the rates of inflation expected to prevail for the next year in the U.S. is 2% and 3% in the euro zone. What is the one-year forward rate that should prevail? Answer

· Question 3

0 out of 3 points

	Suppose you observe a spot exchange rate of $1.50/€. If interest rates are 3% APR in the U.S. and 5% APR in the euro zone, what is the no-arbitrage 1-year forward rate? Answer

· Question 4

3 out of 3 points

	Suppose you observe a spot exchange rate of $2.00/£. If interest rates are 5% APR in the U.S. and 2% APR in the U.K., what is the no-arbitrage 1-year forward rate? Answer

· Question 5

3 out of 3 points

	Covered Interest Arbitrage (CIA) activities will result in Answer

· Question 6

3 out of 3 points

	Researchers have found that the fundamental approach to exchange rate forecasting Answer

· Question 7

3 out of 3 points

	Suppose that the annual interest rate is 5.0 percent in the United States and 3.5 percent in Germany, and that the spot exchange rate is $1.12/€ and the forward exchange rate, with one-year maturity, is $1.16/€. Assume that an arbitrager can borrow up to $1,000,000. If an astute trader finds an arbitrage, what is the net cash flow in one year? Answer

· Question 8

3 out of 3 points

	The Fisher effect can be written for the United States as: Answer

· Question 9

3 out of 3 points

	Forward parity states that Answer

· Question 10

3 out of 3 points

	The Fisher effect states that Answer

· Question 11

3 out of 3 points

	Consider a bank dealer who faces the following spot rates and interest rates. What should he set his 1-year forward bid price at? Answer

· Question 12

3 out of 3 points

	A formal statement of IRP is Answer

· Question 13

3 out of 3 points

	According to the technical approach, what matters in exchange rate determination is Answer

· Question 14

3 out of 3 points

	If the annual inflation rate is 2.5 percent in the United States and 4 percent in the U.K., and the dollar appreciated against the pound by 1.5 percent, then the real exchange rate, assuming that PPP initially held, is _____. Answer

· Question 15

3 out of 3 points

	Suppose that you are the treasurer of IBM with an extra US$1,000,000 to invest for six months. You are considering the purchase of U.S. T-bills that yield 1.810% (that’s a six month rate, not an annual rate by the way) and have a maturity of 26 weeks. The spot exchange rate is $1.00 = ¥100, and the six month forward rate is $1.00 = ¥110. The interest rate in Japan (on an investment of comparable risk) is 13 percent. What is your strategy? Answer

· Question 16

3 out of 3 points

	Find the value of a one-year put option on $15,000 with a strike price of €10,000. In one year the exchange rate (currently S0($/€) = $1.50/€) can increase by 60% or decrease by 37.5% (i.e. u = 1.6 and d = 0.625). The current one-year interest rate in the U.S. is i$= 4% and the current one-year interest rate in the euro zone is i€= 4%. Answer

· Question 17

3 out of 3 points

	For European currency options written on euro with a strike price in dollars, what of the effect of an increase in the exchange rate S(€/$)? Answer

· Question 18

3 out of 3 points

	Most exchange traded currency options Answer

· Question 19

3 out of 3 points

	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. Immediate exercise of this option will generate a profit of Answer

· Question 20

3 out of 3 points

	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 short 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 Answer

· Question 21

3 out of 3 points

	Which equation is used to define the futures price? Answer

· Question 22

0 out of 3 points

	Yesterday, you entered into a futures contract to buy €62,500 at $1.50 per €. Suppose the futures price closes today at $1.46. How much have you made/lost? Answer

· Question 23

3 out of 3 points

	Find the hedge ratio for a put option on $15,000 with a strike price of €10,000. In one period the exchange rate (currently S($/€) = $1.50/€) can increase by 60% or decrease by 37.5% (i.e. u = 1.6 and d = 0.625). Answer

· Question 24

3 out of 3 points

	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? Answer

· Question 25

3 out of 3 points

	American call and put premiums Answer

· Question 26

3 out of 3 points

	Find the dollar value today of a 1-period at-the-money call option on €10,000. The spot exchange rate is €1.00 = $1.25. In the next period, the euro can increase in dollar value to $2.00 or fall to $1.00. The interest rate in dollars is i$ = 27.50%; the interest rate in euro is i€= 2%. Answer

· Question 27

3 out of 3 points

	For European currency options written on euro with a strike price in dollars, what of the effect of an increase in r$ relative to r€? Answer

· Question 28

3 out of 3 points

	Yesterday, you entered into a futures contract to sell €62,500 at $1.50 per €. Your initial performance bond is $1,500 and your maintenance level is $500. At what settle price will you get a demand for additional funds to be posted? Answer

· Question 29

3 out of 3 points

	For European options, what of the effect of an increase in St? Answer

· Question 30

3 out of 3 points

	An “option” is Answer