Explain the bid—ask spread in the external currency market? What will be an ideal response? ANSWER Answer: The bid-ask spread in the external currency market is the difference between the bid rate, which is the interest rate that the bank pays on its deposits and the ask rate, which is the interest rate […]
Date: September 19th, 2020
The risk that is associated with an asset’s return arising from the covariance of the return with the return on a large, well-diversified portfolio is known as ________ risk. A) business B) exchange rate C) market D) systematic ANSWER Answer: D
Date: September 19th, 2020
Assuming that a firm has done all it can to stimulate customers to pay promptly and to select vendors offering the most attractive and flexible credit terms, it can further speed collections and slow disbursements by taking advantage of the “float&qu existing in the collection and payment systems. Indicate whether the statement is true or […]
Date: September 19th, 2020
Because systematic risk measures how much an asset’s return co-moves with the market, it ________. A) can be diversified away with the appropriate hedging B) cannot be diversified away C) is partially driven by idiosyncratic risk D) can be completely eliminated using international securities ANSWER Answer: B
Date: September 19th, 2020
Identify an external currency market and how it operates? What will be an ideal response? ANSWER Answer: An external currency market is an interbank market for deposits and loans that are denominated in currencies that are not the currency of the country in which the bank is operating. Its settlement procedures are identical […]
Date: September 19th, 2020
Given an example of how a money market hedge is constructed? What will be an ideal response? ANSWER Answer: If the underlying business transaction gives you a liability in foreign currency, you can borrow domestic currency, convert the principal from the borrowing into foreign currency, and invest the foreign currency thereby acquiring a […]
Date: September 19th, 2020
Float exists when a payee has received funds in a spendable form but these funds have not been withdrawn from the account of the payer. Indicate whether the statement is true or false ANSWER FALSE
Date: September 19th, 2020
If volatility in foreign exchange markets, what is the relationship to the bid—ask spread? What will be an ideal response? ANSWER Answer: The bid-ask spread compensates the bank’s trader for making a market in the two currencies. This requires that the trader hold an inventory of foreign currency, and an increase in volatility […]
Date: September 19th, 2020
It is often said that interest rate parity is satisfied when the differential between the interest rates denominated in two currencies equals the forward premium or discount between the two currencies. Explain why this is an imprecise statement when the interest rates are not continuously compounded. ANSWER Answer: Interest rate parity requires the […]
Date: September 19th, 2020
If there is no systematic difference between the forward rate and the expected future spot rate, then the expected forward market return should be ________. A) zero B) greater than one C) equal to the stockholders’ required rate of return D) less than one but greater than zero ANSWER Answer: A
Date: September 19th, 2020
