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Practice Exam I
Name
INTERNATIONAL FINANCE
Fall 2006
Multiple Choice -- Circle the letter of the BEST answer (4 points each)
1. A country’s international transactions can be grouped into the following three primary types:
a.
b.
c.
d.
e.
current account, medium term account, and long term account
current account, long term account, and capital account
current account, capital account, and official reserve account
current account, trade account, and official reserve account
none of the above
2. The spot rate of exchange between the Mexican peso (MXN) and U.S. Dollar (USD) in New
York is MXN 11.95/USD and the 6-month futures rate is MXN 12.4328/USD. If U.S. interest
rates are 5% per annum then the annual interest rate in Mexico must be
a.
6.1%
Mexico is the domestic country in this case :
b.
8.7%
FS
1  id
1  id
 12.4328  11.95 *
1  if
1.025
1  i d  1.0664
Annual i d  6.64% * 2  13.28%
c.
d.
e.
17.4%
22.6%
none of the above
3. A money market hedge is advantageous when
a.
b.
c.
d.
e.
no futures contracts are traded on a currency
the date of settlement of the currency exposure is unusually long (for example, 13
months)
there is considerable concern about the government imposing restrictions on currency
convertibility
All of the above
None of the above
4. If a U.S. firm desired to lock in the minimum amount it would receive for an account receivable
in euros, but wanted to be able to capitalize if the euro appreciates substantially against the
dollar by the time payment is made, the most appropriate hedge would be to
a.
b.
c.
d.
e.
use a forward hedge
use a money market hedge
purchase a call option
sell a call option
none of the above (the correct answer is purchase a put option)
5. Assume that the Canadian dollar (CAD) is equal to USD 0.8800 and the Argentine peso
(ARS) is equal to USD 0.3500. The value of the Argentine peso in terms of Canadian dollars
is approximately
a.
b.
c.
d.
e.
0.3080 Canadian dollars per peso
0.3977 Canadian dollars per peso
2.5143 Canadian dollars per peso
3.2468 Canadian dollars per peso
none of the above
CAD 1.00 USD 0.35
*
 CAD 0.3977 per ARS
USD 0.88 ARS 1.00
6. Which of the following is TRUE?
a.
b.
c.
d.
e.
The longer the time to maturity, the less the value of a currency call option, other things
equal.
The longer the time to maturity, the less the value of a currency put option, other things
equal.
The higher the spot rate relative to the exercise price, the greater the value of a currency
put option, other things equal.
The lower the exercise price relative to the spot rate, the greater the value of a
currency call option, other things equal.
None of the above are true.
7. The commonly accepted goal of the multinational corporation is to
a.
b.
c.
d.
e.
maximize expected earnings per share
minimize the probability of illiquidity
maximize shareholder wealth
minimize risk
none of the above
8. Which of the following does NOT influence exchange rates?
a.
b.
c.
d.
e.
interest rates
quotas
supply and demand for goods
monetary policy
All of the above influence exchange rates
9. Forward and futures contracts
a.
b.
c.
d.
e.
are riskless
transfer foreign exchange risk to the buyer of the contract
can create a risk position that exactly offsets another risk position
transfer foreign exchange risk to the seller of the contract
None of the above
10. If inflation in the U.S. is consistently higher than inflation in Switzerland, then for purchasing
power parity to hold
a.
b.
c.
d.
e.
the value of the Swiss franc with respect to the U.S. dollar will generally appreciate
the value of the Swiss franc with respect to the U.S. dollar will generally depreciate
the value of the Swiss franc with respect to the U.S. dollar would generally remain
constant
The value of the Swiss franc with respect to the U.S. dollar would appreciate in some
periods and depreciate in other periods, but on average have a zero rate of appreciation
not enough information to tell
11. The spot selling quotes (direct rates) for foreign currency in New York are as follows:
Japan – Yen (¥)
Britain – Pound (£)
0.0091
1.5558
The Yen rate in London is 0.0061 pounds/yen. Ignoring transactions costs, can a profit be
made through arbitrage? Assume you have USD 1 million with which to work. (15 points)
The Cross rate for pounds and yen using the USD - ¥ rate of exchange and USD - £ exchange rate is
USD .0091
£ 1.00
*
 £ 0.0058 per yen  £ 0.0061 per yen
¥ 1.00
USD 1.5558
hence, we want to sell yen at the quoted rate. First, we' ll buy yen with dollars and then sell the yen
for pounds. Finally, we' ll sell the pounds for dollars
Start with USD 1,000,000
Buy Yen
Yen
Buy Pounds with Yen
Pounds
Buy US dollars with Pounds
Dollars
USD 1,000,000
÷USD 0.0091/¥
¥ 109,890,110
*
£ 0.0061/¥
£
670,330
* USD 1.5558/£
USD 1,042,899
So we made a $42,899 profit on the series of transactions.
12. You have just sold a large shipment of goods from a German firm for 1,000,000 euros (€)
receivable in six months. The current rate of exchange is USD 1.2342/€ and the six-month
forward rate is USD 1.2508/€.
A. How much would you receive if you used a forward hedge? (3 points)
€
1,000,000
USD 1.2342/€
USD 1,234,200
B. Your affiliate can borrow in Germany at a rate of 3% per annum, while you can invest in
the United States at a rate of 5% per annum. How much would your firm receive, in six
months’ dollar terms, if you used a money market hedge? (6 points)
Borrow against the receivable at 1½%: € 1,000,000/1.015 = € 985,222
Convert to USD at the spot rate = € 985,222 * USD 1.2342 = USD 1,215,961
Invest in the US at 2½% for six months: USD 1,215,961 * 1.025 = 1,246,360
C. A six-month put option on euros can be purchased for 2 cents per euro with a strike
price of USD 1.25 per euro. How much would an option hedge net you (net and in six
months) if the euro closes at $1.2562 per euro on settlement date? (6 points)
If the spot rate at settlement date is USD 1.2562, then the put with a strike price of
USD 1.25 will not be exercised. Sell the euros at the spot rate.
€ 1,000,000*USD 1.2562 = USD 1,256,200
Less: Cost of Put =
- USD 20,000
Net Received =
USD 1,236,200
13. The Mexican government wants to calm the concerns of a large portion of the Mexican
population who feel that the recent presidential election was stolen from López Obrador;
consequently, it is revoking the NAFTA agreement and imposing steep tariffs on goods from
the United States and Canada.
A.
What would be the immediate effect on the exchange rate and why? (5 points)
B.
What effect would the exchange rate change in (A) above have on employment and
inflation and why? (5 points)
C. What would be the longer term effect of (A) and (B) on the exchange rate and why?
(5 points)
14. A currency call option's value is a function of six variables. Identify these variables, the effect
that a change in each variable (individually) has on the value of a call option, and why a
change causes such an effect on the value of a call option. (15 points)