First midterm

1. An investment bank buys a currency that has high rate of interest and funds the purchase
by borrowing in a currency with low rates of interest, without any hedging. This is
considered to be
a. An arbitrage
b. A currency trade
c. A deviation from purchasing power parity
d. None of the listed options

2. The loss of national monetary and exchange rate policy independence, is a consequence
of:
a. Monetary union
b. A flexible exchange rate regime
c. The Bretton woods system
d. None of the listed options

3. In the balance of payments of country, which of the following accounts includes all
Imports and exports of goods and services
a. The capital account
b. The reserves account
c. The current account
d. All of the listed options

4. A Chilean resident with Colombian pesos, goes to Colombia and purchases a bag of coffee
for COP 500. Then he takes the bag with him back to Chile
In which account the debit of the Colombian currency would be recorded in the Chilean
balance of payments.
a. Capital and financial account
b. Current account
c. Savings account
d. None of the listed options

5. Which of the following is not a characteristic of the classic gold standard?

a. Gold alone was assured of unrestricted coinage*
b. There was two-way convertibility between gold and national currencies at a stable
ratio
c. Gold could be freely exported or imported
d. None of the listed options
 A system in which a country has its currency linked directly to gold

6. Determine to which concept the following description applies to:

 ¨it is the institutional framework within which international payments are made,
movements of capital are accommodated and exchange rate among currencies are
determine¨
a. Balance of payments
b. Purchasing power parity
c. International monetary system
d. Interest rate parity
e. Corporate government
f. None of the listed options

7. Determine whether the following statement is true or false:

_¨ a current account deficit can be financed by a capital account surplus¨

a. Verdadero
b. Falso

8. In which market does a company float its shares in an IPO

a. Primary market
b. Secondary market
c. Agency market
d. All of the listed options

9. Which of the following characteristics belong to the SDR´s

a. It is an international reserve asset
b. It is a potential claim on the freely usable currencies of IMF members
c. It is the unit of account of the IMF
d. All of the listed options

10. Is the following statement true or false. ¨if interest rate parity does not hold, it is possible
to make profits on an arbitrage¨
a. Verdadero
b. Falso

11. Which kind of investment is described by the following statement?

¨represents sales and purchases of foreign financial assets such as stocks and bonds that
do not involve a transfer of control¨
a. Direct investment
b. Portfolio investment
c. Other investment
d. None of the listed options

12. Determine to which kind of bonds does the description belong to:
 ¨bonds are sold at a discount from face value and do not pay any coupon interest over
their life. At maturity the investor receives the full face value¨
a. Medium- term notes
b. Zero-coupon bonds
c. Dual- currency bonds
d. None of the listed options

13. Given the following information,. Determine if there is the possibility of an interest rate
covered arbitrage. Assume that interest rate parity holds, and that there are no
transactions costs. (4 decimal points):
Spot exchange Rate: 109.2700 JPY/USD
1 year Forward Exchange Rate: 109.1827 JPY/USD
US treasury Bond – 1 year interest rate: 0.11%
Japan Government Bond – 1 year interest rate: 0.03%

a. No, an arbitrage is not possible

b. Yes, an arbitrage is possible
c. There is not enough information to determine if an arbitrage is possible

14. Exercise:
The cost of an ounce of gold in japan is JPY 4,281.43
The cost of an ounce of gold in he US is USD 39.18
The expected one-year inflation rate in Japan is expected to be at 3.10%
An investment bank is quoting the one year forward exchange rate at 110.8574 JPY per
USD
What is the expected one year inflation?
1.63%

15. Given the following information, determine the equilibrium forward exchange rate, between
the USD and the GBP. Assume that Interest Rate Parity holds, and that are no transaction costs.
Spot Exchange Rate: 0.6442 GBP/USD
US Treasury Bond: 1-year interest rate: 0.11%
UK Government Bonds: 1-year interest rate: 0.544%

a. 1.6325 USD/GBP
b.0.6127 GBP/USD
c. 1.6324 USD/GBP
d. 1.6355 USD/GBP
e. 1.6138 USD/GBP
f. 1.6186 USD/GBP
g. 1.5456 USD/GBP
h. 0.6155 GBP/USD
SECOND MIDTERM

1. Which kind of Exchange rate risk exposure is described by the following definition? “The
effect that unanticipated changes in exchange rates have on the firm’s cash flows”

Translation Exposure

2. A call option on the EURO that expires in a month from now has a strike price of USD
1,23931 and a premium of USD 0.00001

The following quotes are being provided by your FX dealer:

Given this Information you can say that right now the option is:
None
In the money
At the money
Out of the money
3. Which kind of options can only be exercised on the expiration date?

European options

4. According to which Translation Method, cash is translated into another currency at the
spot exchange rate (hint: there is only one correct answer)

Current Rate Method

Temporal Method
Current/Non current method
Monetary/Non Current Method
All of the possible listed answers

5. If you have agreed to sell an FX forward, you are taking a position which is a:

Short position
Long position
None of the possible listed answers

6. Determine to which kind of derivative does this description belongs to:

“A customized contract between two parties to buy or sell an asset at a specified price
on a future date”
 Call option
Put option
Future contracts
Forward contracts
None of the possible listed answers

7. Determine if the following statement is true or false:

“Financial hedging involves the use of derivative securities such as currency swaps,
futures, forwards, but not currency options”
Verdadero
Falso

8. Which of the following strategies allows managing operating exposure?

 Diversification of the Market
 Financial Hedging
 Flexible Sourcing Policy
 Selecting Low Cost Production Sites
 All of the possible listed answers
 R&D and Product Differentiation

9. The American Terms GBPUSD Bid Quote is 1.5653, and the ask quote is 1.5659.
Determine the European Terms Bid and Ask quotes.
Bid – Ask: 0.6389 – 0.6386
10. Indicate to which basic option profit profile belongs the following graph:

Short Put Option

Long Put Option
Short Call Option
Long Call Option
None of the possible listed answers

11. Determine whether or not the following statement is true or false:

“claring houses act a third parties to all fordwards, futures and options contracts
False

12. A company is taking a derivative contracts in order to minimize the exposure it has to
the effect of exchange rate volatility. The company has done some research and thinks
that the local currency could depreciate in the next 12 months. By doing this, the
company is

Hedging
None of the possible listed
Speculating

13. Determine if the following statement is true or false

¨changes in exchange rates affect only firms that are directly engaged in international
trade, as they are exposed to exchange rate risk, due to the nature of imports and
exports¨

True

False

14. Which kind of exchange rate risk exposure iss described by the following definition?

¨the extent to which the value of the firm would be affected by unanticipated changes in
exchange rates¨
 o Translation exposure
o Transaction exposure
o Economic exposure
o All of the listed options
15. At its expiration a put option is said to be in the money if:

o The spot price is higher or equal to the exercise price

o The spot price is lower than the exercise price
o There is not enough info to answer
o The spot price is the same as the exercise price

16. If you agreed to sell an FX forward, you are taking a position which is a:

o Long position
o Short position
o None of the listed options
17. Which of the following strategies allows managing operating exposure?
Selecting low cost production sites
R&D and product differentiation
Diversification of the market
Flexible sourcing policy
Financial hedging
All of the listed answers

18. A contract that gives you the right but not the obligation to sell a particular asset in the
future at a given exercise price
A futures contract
A forward contract
A CDS
A call option
A put option
A money market hedge
None of the listed answers

19. Apple has purchased electronic components from Murata Manufacturing co. a Japanese
electronics concern, and was billed ¥250 million payable in three months. Currently, the
spot exchange rate is ¥ 105/$ and the 3-month forward rate is ¥100/$.

The three-month money market interest rate is 8%per annum in the U.S and 7% per
annum in Japan.

The management of apple has decided to use the money market hedge to deal with this
yen account payable.

Determine the current dollar value of the conducting the money market hedge

2221329.7750
20. Boeing has just signed a contract to sell a boeing 767aircraft to Air Europa. Air Europa
will be billed €20 million which is payable in one year. The current spot exchange rate is
$1.05/€ and the one-year forward rate quoted by the BBVAcurrency desk is $1.10/€, the
annual interest rate is 6.% in the US and 5.0% in France. Boeing is concerned with the
volatile exchange rate between the dollar and the euro and would like to hedge the
exchange exposure.

It is considering two hedging alternatives:

- Sell the europ proceeds from the sale forward

- Borrow euros from the banco sanatnder against the euro receivable

Which alternative would you recommend why

No hedge

Money market hedge

21. US importer

22. Transactions
23. TRIANGULAR ARBITRAGE

24. Strike price