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 […]
Float exists when a payee has received funds in a spendable form but these funds have not been withdrawn from the account of the payer.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
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 […]
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 […]
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
Describe the sequence of transactions required to do a covered interest arbitrage out of British pound and into U.S. dollars. What will be an ideal response? ANSWER Answer: To do a covered interest arbitrage out of ₤ and into U.S. dollars, one would borrow ₤ from the bank at the bank’s ask interest […]
When the forward rate is equal to the expected future spot rate, the forward rate is said to be ________ the future spot rate. A) an information signal for B) an unbiased predictor of C) a hedge for D) in parity with the expected future spot rate ANSWER Answer: B
Collection float is experienced by a payer and is a delay in the receipt of funds. Indicate whether the statement is true or false ANSWER FALSE
Which one of the following would some say invalidates the unbiasedness hypothesis? A) the Fisher Effect B) the efficient market hypothesis C) the Siegel paradox D) the law of one price ANSWER Answer: C
If market efficiency is identified with parity, currency markets that are ________ provide no opportunities for currency traders to earn profits. A) not in parity B) in parity C) in interest rate parity only D) in purchasing power parity ANSWER Answer: B
