Management of Forex Transactions

Assignment for Pan African Network

Management of Forex Transactions

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Assignment ‘A’

Ques 1: What do you mean by the term “foreign exchange”? How can we determine foreign exchange rate? Discuss the theories in brief.

Ques 2: Outline the differences between a ‘market’ and a ‘Financial Market’. Explain the features of a financial market.

Ques 3: Define ‘Derivatives’. What are the types of derivative instruments?

Ques 4: Differentiate Futures And Forwards. Outline the features of both of them.

Ques 5: Calculate the future price.

a) The spot price of WALMART is USD 300. The bank rate is 10%. What will be the price of 1 month future

b) What would be the price if company pays a dividend of 5%.

Assignment - B

Ques 1: What do you mean by ‘International Financial Market’? Explain in role in promoting international trade and development.

Ques 2: What do you mean by Balance of Payments? Explain its components and their significance for an economy.

Ques 3: THE FOLLOWING RATES ARE GIVEN

• SPOT(RS/EURO)—57.90 58.10

• I MTH FWD 57.50 57.80

• FIND WHETEHER EURO IS PREMIUM/DISC

• CALCULATE ANNUALISED PREMIUM/DISC

• INTERPRETATION TO THIS FIGURE?

• AVG(MID RATE)FOR 3M,6M,12M FWD CONTRACTS ASSUMING SPREADS RS 0.50,0.80,1.00

CASE STUDY

1. What do you mean by the term ‘Arbitrage’? Discuss its significance.

Following are the rates of $/ Euro applicable in one country

BUY SELL

• BANK A $/EURO 1.3160 1.3260

• BANK B 1.3280 1.3380

While the rates in banks of US and Germany are the following:

BUY SELL

• US BANK ($/EURO) 1.3160 1.3260

• GERMANY(EURO/$) 0.7475 0.7525

a) Is their any arbitrage opportunity within the country?

b) Does arbitrage opportunity exist between US and GERMANY?

Assignment - C

Objective Questions

1. Find the forward rate of foreign currency Y if the spot rate is $4.50, the domestic interest rate is 6 percent, the foreign interest rate is 7 percent, and the forward contract is for nine months.

a) $5.104

b) none are correct

c) $4.458

d) $4.532

e) e. $4.468

2. Margin in a futures transaction differs from margin in a stock transaction because

a) stock transactions are much smaller

b) delivery occurs immediately in a stock transaction

c) no money is borrowed in a futures transaction

d) futures are much more volatile

3. Most futures contracts are closed by

a) exercise

b) offset

c) default

d) none are correct

e) delivery

4. Which of the following is not a forward contract?

a) an automobile lease non-cancelable for three years

b) none are correct

c) a signed contract to buy a house in six months

d) a long-term employment contract at a fixed salary

e) a rain check

5. One of the advantages of forward markets is

a) none are correct

b) the contracts are private and customized

c) trading is conducted in the evening over computers

d) performance is guaranteed by the G-30

e) trading is less costly and governed by more rules

6. Suppose you sell a three-month forward contract at $35. One month later, new forward contracts are selling for $30. The risk-free rate is 10 percent. What is the value of your contract?

a) $4.55

b) $4.96

c) $4.92

d) $5

e) none are correct

7. Futures prices differ from spot prices by which one of the following factors?

a) the systematic risk

b) the risk premium

c) the spread

d) none are correct

e) the cost of carry

8. An option which gives the holder the right to sell a stock at a specified price at some time in the future is called a(n)

a. Call option.

b. Put option.

c. Out-of-the-money option.

d. Naked option.

e. Covered option.

9. There are call options on the common stock of XYZ Corporation. Which of the following best describes the factors affecting the value of these call options?

a. The price of the call options is likely to rise if XYZ’s stock price rises.

b. The higher the strike price on the call option, the higher the call option price.

c. Assuming the same strike price, a call option which expires in one month will sell for a higher price than a call option which expires in three months.

d. All of the answers above are correct.

e. None of the answers above is correct.

10. Which of the following statements is correct?

a. Put options give investors the right to buy a stock at a certain exercise price before a specified date.

b. Call options give investors the right to sell a stock at a certain exercise price before a specified date.

c. Options typically sell for less than their exercise value.

d. LEAPS are very short-term options which have begun trading on the exchanges in recent years.

e. Option holders are not entitled to receive dividends unless they choose to exercise their option.

11. An investor who writes call options against stock held in his or her portfolio is said to be selling ___________ options.

a. in-the-money

b. put

c. naked

d. covered

e. out-of-the-money

12. A commercial bank estimates that its net income suffers whenever interest rates increase. The bank is looking to use derivatives to reduce its interest rate risk. Which of the following strategies best protects the bank against rising interest rates?

a. Buying inverse floaters.

b. Entering into an interest rate swap where the bank receives a fixed payment stream, and in return agrees to make payments that float with market interest rates.

c. Purchase principal only (PO) strips that decline in value whenever interest rates rise.

d. Enter into a short hedge where the bank agrees to sell interest rate futures.

e. Sell some of the banks floating rate loans and use the proceeds to make fixed rate loans.

13. Company A can issue floating rate debt at LIBOR + 1 percent and can issue fixed rate debt at 9 percent. Company B can issue floating rate debt at LIBOR + 1.4 percent and can issue fixed rate debt at 9.4 percent. Suppose A issues floating rate debt and B issues fixed rate debt. They engage in the following swap: A will make a fixed 7.95 percent payment to B, and B will make a floating rate payment equal to LIBOR to A. What are the resulting net payments of A and B?

a. A pays a fixed rate of 9 percent, B pays LIBOR + 1.5 percent.

b. A pays a fixed rate of 8.95 percent, B pays LIBOR + 1.45 percent.

c. A pays LIBOR plus 1 percent, B pays a fixed rate of 9.4 percent.

d. A pays a fixed rate of 7.95 percent, B pays LIBOR.

e. None of the answers above is correct.

14. Which of the following are not ways in which risk management can increase the value of a company?

a. Risk management can increase debt capacity.

b. Risk management can help a firm maintain its optimal capital budget.

c. Risk management can reduce the expected costs of financial distress.

d. Risk management can help firms minimize taxes.

e. Risk management can allow managers to maximize their bonuses.

15. Which of the following statements is most correct?

a. One advantage of forward contracts is that they are default free.

b. Futures contracts generally trade on an organized exchange and are marked to market daily.

c. Goods are never delivered under forward contracts, but are almost always delivered under futures contracts.

d. Answers a and c are correct.

e. None of the answers above is correct.

16. Multinational financial management requires that

a. The effects of changing currency values be included in financial analyses.

b. Legal and economic differences be considered in financial decisions.

c. Political risk be excluded from multinational corporate financial analyses.

d. All of the above.

e. Only a and b above.

17. If the inflation rate in the United States is greater than the inflation rate in Sweden, other things held constant, the Swedish currency will

a. Appreciate against the U.S. dollar.

b. Depreciate against the U.S. dollar.

c. Remain unchanged against the U.S. dollar.

d. Appreciate against other major currencies.

e. Appreciate against the dollar and other major currencies.

18. If one Swiss franc can purchase $0.71 U.S. dollars, how many Swiss francs can one U.S. dollar buy?

a. 0.71

b. 1.41

c. 1.00

d. 2.81

e. 0.50

19. If the spot rate of the French franc is 5.51 francs per dollar and the 180-day forward rate is 5.97 francs per dollar, then the forward rate for the French franc is selling at a ________________ to the spot rate.

a. premium of 8%

b. premium of 18%

c. discount of 18%

d. discount of 8%

e. premium of 16%

20. Hockey skates sell in Canada for 105 Canadian dollars. Currently, 1 Canadian dollar equals 0.71 U.S. dollars. If purchasing power parity (PPP) holds, what is the price of hockey skates in the United States?

a. $ 14.79

b. $ 71.00

c. $ 74.55

d. $ 85.88

e. $147.88

21. The relationship between the exchange rate and the prices of tradable goods is known as the:

a) Purchasing-power-parity theory

b) Asset-markets theory

c) Monetary theory

d) Balance-of-payments theory

22. If wheat costs $4 per bushel in the United States and 2 pounds per bushel in Great Britain, then in the presence of purchasing-power parity the exchange rate should be:

a) $.50 per pound

b) $1.00 per pound

c) $2.00 per pound

d) $8.00 per pound

23. A primary reason that explains the appreciation in the value of the U.S. dollar in the 1980s is:

a) Large trade surpluses for the United States

b) High inflation rates in the United States

c) Lack of investor confidence in the U.S. monetary policy

d) High interest rates in the United States

24. When the price of foreign currency (i.e., the exchange rate) is above the equilibrium level:

a) An excess supply of that currency exists in the foreign exchange market

b) An excess demand for that currency exists in the foreign exchange market

c) The supply of foreign exchange shifts outward to the right

d) The supply of foreign exchange shifts backward to the left

25. The international exchange value of the U.S. dollar is determined by:

a) The rate of inflation in the United States

b) The number of dollars printed by the U.S. government

c) The international demand and supply for dollars

d) The monetary value of gold held at Fort Knox, Kentucky

26. Which of the following is an example of foreign exchange?

a) Exchange of cash issued by a foreign central bank.

b) Exchange of claims denominated in another currency.

c) Exchange of bank deposits.

d) All of the above.

27. Which of the following are usual suppliers of Euros?

a) US foreign investors remitting profits.

b) European direct investors.

c) US exporters.

d) All of the above.

28. The vast majority of large-scale foreign exchange transactions in the US are:

a) done through foreign exchange brokers.

b) done through Morgan-Chase and Deutsche Bank of America.

c) done through Interbank.

d) done through the Chicago Mercantile Exchange

29. If a company contracts today for some future date of actual currency exchange, they will be making use of a:

a) stock rate.

b) variable rate.

c) futures rate.

d) forward rate.

30. Which of the following might affect the cost of a trip to Japan by a resident of Britain?

a) The depreciation of the Euro.

b) The time at which the British resident purchases Yen.

c) The depreciation of the US dollar.

d) All of the above.

31. A company that functions to unite sellers and buyers of foreign currency-denominated bank deposits is called:

a) a broker.

b) an investor.

c) a wholesaler.

d) a bank

32. _____________ contracts are more widely accessible to firms and individuals than ____________ contracts.

a) Futures; forward

b) Forward; futures

c) Forward; arbitrageur

d) Arbitrageur; forward

33. If the euro dollar deposit rate is 3% per year and the euro-euro rate is 6% per year, by how much will the euro be expected to devalue in the coming year?

a) 0.3%

b) 2.0%

c) 2.9%

d) 3.0%

34. According to which theory will differences in nominal interest rates be eliminated in the exchange rate?

a) The PPP.

b) The Fisher effect.

c) The Leontief paradox.

d) The combined equilibrium theory.

35. If inflation goes up in the US relative to other countries, it is expected that the price of the US dollar will:

a) increase.

b) remain the same.

c) fall.

d) may increase or decrease.

36. Which of the following is an exchange risk management technique through which the firm contracts with a third party to pass exchange risk onto that party, via instruments such as forward contracts, futures, and options?

a) Diversification.

b) Risk avoidance.

c) Risk transfer.

d) Risk adaptation.

37. What is the base interest rate paid on deposits among banks in the eurocurrency market called?

a) INEC.

b) EUIN.

c) LIBOR.

d) INEU.

38. Which of the following contract terms is not set by the futures exchange?

a) the price

b) the deliverable commodities

c) c. the dates on which delivery can occur

d) d. the size of the contract

e) e. the expiration months

39. Which one is the best derivative instrument according to you?

a) Forwards

b) Futures

c) Options

d) Swap

40. What does premium mean?

a) Reduction in the contract value

b) Increase in the contract value

c) Constant value of the contract price

d) None of these.