Final Exam, Essay Questions, 20 Points
Instruction: Please show your work and defend the answer
1. Exchange rate fluctuations contribute to the risk of foreign investment through three possible channels:
Which of the following contributes and accounts for most of the volatility? A. (i) and (ii)
B. (ii) and (iii)
C. (i) and (iii)
D. only (ii)
Answer is B = “exchange rate fluctuations contribute to the risk of foreign investment through three possible channels:
1. Its own volatility, Var( e i).
2. Its covariance with the local market returns, Cov( R i e i). 3. The contribution of the cross-product term, Var.” (p.g.359) international financial management
2. Your firm is bidding on a large construction contract in a foreign country. This contingent exposure could best be hedged A. With put options on the foreign currency
B. With call options on the foreign currency
C. Both a) and b), depending upon the specifics ("the rest of the story") D. With futures contracts.
Answer: A the alternative is to buy a put option on foreign currency in that it will accept the bidding and lessen exchange rate.
3. The current exchange rate is €1.25 = 1.00 and a British firm offers a French customer the choice of paying a 10,000 bill due in 90 days with either 10,000 or €12,500. A. The seller has given the buyer an at-the-money put option on euro with a strike in pounds. B. The seller has given the buyer an at-the-money put option on pounds with a strike in euro. C. The seller has given the buyer an at-the-money call option on euro with a strike in pounds. D. None of the above
Answer: d. none of the above
4. A swap bank makes the following quotes for 5-year swaps and AAA-rated firms:
A. The bank stands ready to pay $5.2% against receiving dollar LIBOR on 5-year loans. B. The bank stands ready to receive €7% against receiving dollar LIBOR on 5-year loans. C. The bank stands ready to pay €7% against receiving dollar...
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