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  1. A U.S investor invested $1 million in € deposits on October 4, 2000 at 7% for four years (per annum, annual compounding). The exchange rate on the investment date was $0.8726/€. On the maturity (October 4, 2004), the exchange rate was $1.2274/€. What was the U.S investor’s return on Investment (measured in U.S dollars)?
  2. On April 2, 2015, the spot exchange rate between U.S $ and the euro was $1.0874/€, the one year US$ LIBOR interest rate was 0.69235% and the one-year euro LIBOR interest rate was 0.1950%. If the interest rate parity (the exact formula) holds, what is the forward exchange rate between U.S. $ and the euro (dollar per euro)? (Sources of information: Exchange rate – Federal Reserve; LIBOR rates – Global Rates.com)
  3.  On April 2, 2015, the spot exchange rate between U.S $ and the euro was $1.0874/€, the one year US$ LIBOR interest rate was 0.69235% and the one-year euro LIBOR interest rate was 0.1950%. If the interest rate parity (the exact formula) holds, what is the forward exchange rate between U.S. $ and the euro (dollar per euro)? (Sources of information: Exchange rate – Federal Reserve; LIBOR rates – Global Rates.com)
  4. On April 2, 2015, the spot exchange rate between U.S $ and the euro was $1.0874/€, the one year US$ LIBOR interest rate was 0.69235% and the one-year euro LIBOR interest rate was 0.1950%. If the interest rate parity (the exact formula) holds, what is the forward exchange rate between U.S. $ and the euro (dollar per euro)? (Sources of information: Exchange rate – Federal Reserve; LIBOR rates – Global Rates.com)
  5. On April 2, 2015, the spot exchange rate between U.S $ and the euro was $1.0874/€, the one year US$ LIBOR interest rate was 0.69235% and the one-year euro LIBOR interest rate was 0.1950%. If the interest rate parity (the exact formula) holds, what is the forward exchange rate between U.S. $ and the euro (dollar per euro)? (Sources of information: Exchange rate – Federal Reserve; LIBOR rates – Global Rates.com)
  6. On April 2, 2015, the spot exchange rate between U.S $ and the euro was $1.0874/€, the one year US$ LIBOR interest rate was 0.69235% and the one-year euro LIBOR interest rate was 0.1950%. If the interest rate parity (the exact formula) holds, what is the forward exchange rate between U.S. $ and the euro (dollar per euro)? (Sources of information: Exchange rate – Federal Reserve; LIBOR rates – Global Rates.com)
  7. A firm sells a “three against six” FRA at 7.5% (annualized) with the notional principal of $2 million. At maturity the interest rate in the market is 6%. How much is the firm cash settlement for the FRA? (Assume dtm is 91 days)
  8. A firm sells a “three against six” FRA at 7.5% (annualized) with the notional principal of $2 million. At maturity the interest rate in the market is 6%. How much is the firm cash settlement for the FRA? (Assume dtm is 91 days)
  9. A U.S. firm considers an investment projects in China. The firm’s cost of capital is 10% but the firm uses 15% as its discount rate for the proposed investment. The initial investment and free cash flows for subsequent years (a horizon of five years with no salvage value) are presented in the table below:
  10. Which of the following is NOT included in the current account of the balance of payments?
    1. Exports and imports of goods and services
    2. Primary income
    3. Foreign direct investment
    4. Current transfers (secondary income)
  11. The U.S current-account deficit increased to $410.6 billion in 2014 from $400.3 billion in 2013. The deficit was 2.4 percent of current-dollar GDP in both 2014 and 2013 (Bureau of Economic Analysis, March 19, 2015). What does the U.S current account deficit means?
  12. Which of the following is NOT true about the IMF and the Bretton Wood system?
  13. According to the Economist, in January 2015, a Big Mac costs $4.79 in the United States and 28 pesos in Argentina. What is the PPP-implied exchange rate between the Argentina peso and the U.S. dollar according to the Big Mac prices?
  14. Before January 15, 2015, the Swiss National Bank (SNB) maintained a cap of the Swiss franc at SFr1.2 per euro. That is, whenever the euro fell below SFr1.2 per euro, the SNB would intervene in the foreign exchange market. Which of the following is a consistent statement about the SNB’s possible actions?
  15. Which of the following is NOT true about real exchange rate?
  16. Suppose you are an American company and have an account payable in one million euro due in six months. Which of the following represents a correct strategy for hedging?
  17. Which of the following is NOT true about “quantitative easing” as a monetary policy tool?
  18. In a The Wall Street Journal article (“A Matter of Exchange Rates,” June 21, 1994), John F. Welch, chairman and CEO of General Electric, said that “If the Japanese are preparing to compete at ______ yen to the dollar, the U.S must be ready to compete at ______ yen. Until we are, we delude ourselves.”
  19. According to the international Fisher effect, if the U.S. dollar interest rate is 4% higher than a comparable Japanese yen interest rate, then the market expects the ______ to ______.
  20. A company producing differential products and having strong market power in the international market will face a relatively _____ price elasticity of demand for its products and possess a relatively ______ degree of pricing flexibility.
  21. Which of the following statements regarding currency derivatives and interest rate derivatives is NOT true?
  22. Which of the following is NOT TRUE according to the U.S. foreign currency translation rule?
  23. The U.S. dollar appreciated substantially from mid-2014 to the first quarter of 2015 against most currencies in the world. Which of the following statement describes an UNLIKELY event associated with the surge of the U.S dollar?
  24. A firm with floating-rate debt that expects interest rates to rise may engage in a swap to
  25. Coca-Cola issued a large amount of debt in euro in the first quarter of 2015. Natural hedging of foreign exchange exposure was a consideration for the euro debt. Which of the following is consistent with Coca-Cola’s natural hedging consideration?
  26. On Thursday, January 15, 2015, the Swiss National Bank abandoned the cap it had set since September 2011 on the Swiss franc’s value against the euro at €1 = SFr1.20. Following the announcement, the exchange rate between the euro and the Swiss franc changed from €1 = SFr1.20 to about €1 = SFr1.00 in the foreign exchange market. How much did the value of the Swiss franc change from €1 = SFr1.20 to €1 = SFr1.00?
  27. Which of the following is NOT a reason why capital budgeting for a foreign projects is more complex than for a domestic project?
  28. A U.S investor purchased $500,000 worth of German equity securities at the price of €60/share at the beginning of the year. At the end of the year, the investor sold all the stocks at a price of €66/share. The exchange rate was $1.35/€ at the beginning of the year and $1.08/€ at the end of the year. What was the investor’s rate of return in dollars for the investment?
  29. On a particular day, an American company, Company A, borrows euro-denominated funds for one year at 1%. In comparison, a similarity rated U.S. company, Company B, borrows a dollar loan with the same maturity at 2.5%. The exchange rate on the borrowing date is $1.1199/€. Assume that the international Fisher effect holds true. What is the expected effective cost of debt in dollars (in percentage) for Company A

Sample of Solution:

Question 1

A U.S investor invested $1 million in € deposits on October 4, 2000 at 7% for four years (per annum, annual compounding). The exchange rate on the investment date was $0.8726/€. On the maturity (October 4, 2004), the exchange rate was $1.2274/€. What was the U.S investor’s return on Investment (measured in U.S dollars)?

Your Answer:   16.53        %

Solution:

Effective Rate of Return: (4√ ((1.07)4* (1.2274/0.8726)) – 1)*100% = 16.53%

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