Tutorial 2 - 2019 S2 - Answers PDF

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EFB 312 – Tutorial 2

1. Assume the Canadian dollar is equal to A$.88 and the Peruvian Sol is equal to A$.35. The value of the Peruvian Sol in Canadian dollars is: a.

about .3621 Canadian dollars.

b.

about .3977 Canadian dollars.

c.

about 2.36 Canadian dollars.

d.

about 2.51 Canadian dollars.

ANSWER: B A$0.88/CAD

A$0.35/PEN

We want the value of 1 Peruvian Sol in Canadian Dollars; CAD/PEN

CAD/PEN = (AUD/PEN) / (AUD/CAD)

=

(0.35/1) / (0.88/1) = 0.3977CAD / PEN

2. Which of the following is not true with respect to spot market liquidity? a.

The more willing buyers and sellers there are, the more liquid a market is.

b.

The spot markets for heavily traded currencies such as the Japanese yen are very liquid.

c.

A currency's liquidity affects the ease with which an MNC can obtain or sell that currency.

d.

If a currency is illiquid, an MNC is typically able to quickly purchase that currency at a reasonable

exchange rate.

ANSWER: D If a currency is illiquid, this means that it is not traded very often (relative to other currencies) and therefore MNC’s may struggle to buy it quickly at a reasonable price.

3. A forward contract can be used to lock in the ____ of a specified currency for a future point in time. a.

purchase price

b.

sale price

c.

A or B

d.

none of the above

ANSWER: C A forward contract specifies a contract that is settled presently but for which the transaction takes place in the future. One can arrange to buy or sell currencies at a future date through forward contracts.

4. The international money market primarily concentrates on: a.

short-term lending (one year or less).

b.

medium-term lending.

c.

long-term lending.

d.

placing bonds with investors.

ANSWER: A

5. The ADR of a British company is convertible into 3 shares of stock. The share price of the company was 30 pounds when the British market closed. When the U.S. market opens, the pound is worth $1.63. The price of this ADR should be $____. a.

48.90

b.

146.70

c.

55.21

d.

none of the above

ANSWER: B 1 Share = 30 GBP.

$1.63/GBP

If 1 GBP = $1.63, then 1 share = 30 x 1.63

ADR = 3 shares so

ADR = 30 x 1.63 x 3 = $146.70

6. An MNC's short-term financing decisions are satisfied in the ____ market, while its medium debt financing decisions are satisfied in the ____ market. a.

international money; international credit

b.

international money; international bond

c.

international credit; international money

d.

international bond; international credit

e.

international money; international stock

ANSWER: A

7. Your company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to hedge your position by selling Japanese yen forward. The current spot rate of the yen is A$.0089, while the forward rate is A$.0095. You expect the spot rate in 60 days to be A$.0090. How many Australian dollars will you receive for the 5,000,000 yen 60 days from now if you sell yen forward? a.

A$44,500

b.

A$45,000

c.

A$526 million

d.

A$47,500

ANSWER: D You are agreeing to sell 5,000,000 YEN in exchange for AUD in 60 days at a rate of A$0.0095/YEN. 5,000,000 x 0.0095 = A$47,500 8. In general, common law countries such as the U.S., Canada, and the United Kingdom allow for more legal protection than French civil law countries such as France or Italy. a. True b. False

ANSWER: A

9. Assume that the Australian one-year interest rate is 3% and the one-year interest rate on New Zealand dollars is 6%. Australia expected annual inflation is 5%, while the New Zealand inflation is expected to be 7%. You have A$100,000 to invest for one year and you believe that PPP holds. The spot exchange rate of a New Zealand dollar is A$0.689. What will be the yield on your investment if you invest in the New Zealand market? a.

6%

b.

3%

c.

4%

d.

2%

ANSWER: C Convert A$100,000 investment to $NZ: 100,000/0.689 = $NZ 145,137.9 Value of investment in $NZ after one year: $NZ 145,137.9 x 1.06 = $NZ 153,846.2 A$ exchange rate after one year: St+1=1.05/1.07x0.689 = A$0.676121 Convert it to A$: $NZ 153,846.2 x A$0.676121 = A$ 104,018.7 Yield in the New Zealand market: (A$ 104,018.7 - A$ 100,000)/ A$ 100,000 = 0.04 -> 4%

10. Assume that the inflation rate in Singapore is 3%, while the inflation rate in the Australia is 8%. According to PPP, the Singapore dollar should ____ by ____% against Australian dollar. a.

appreciate; 4.85

b.

depreciate; 3,11

c.

appreciate; 3.11

d.

depreciate; 4.85

ANSWER: A

% Change in AUD/SGD = (0.08 – 0.03) / 1.03 = 0.0485

11. The inflation rate in Australia is 3%, while the inflation rate in Japan is 10%. The current exchange rate for the Japanese yen (¥) is A$0.0075. After supply and demand for the Japanese yen has adjusted in the manner suggested by purchasing power parity, the new exchange rate for the yen will be: a.

A$0.0076.

b.

A$0.0073.

c.

A$0.0070.

d.

A$0.0066.

ANSWER: C

0.0075 x (1.03 / 1.10) = A$0.00702

12. Under purchasing power parity, the future spot exchange rate is a function of the initial spot rate in equilibrium and: a.

the income differential.

b.

the forward discount or premium.

c.

the inflation differential.

d.

none of the above

ANSWER: C Relative PPP claims that exchange rate movements should exactly offset any inflation differential between two countries.

Additional Questions 13. Research indicates that deviations from purchasing power parity (PPP) are reduced over the long run. a. True b. False

ANSWER: A Exchange rate movements can fluctuate substantially in the short term, but tend to follow a long term general path that can be somewhat predicted by PPP.

14. Because there are a variety of factors in addition to inflation that affect exchange rates, this will: a.

reduce the probability that PPP shall hold.

b.

increase the probability that PPP shall hold.

c.

increase the probability the IFE will hold.

d.

B and C

ANSWER: A The countless number of factors affecting exchange rates, as well as unexpected random events reduce the probability that PPP or any other theory will consistently hold true.

15. Futures contracts are typically ____; forward contracts are typically ____. a.

sold on an exchange; sold on an exchange

b.

offered by commercial banks; sold on an exchange

c.

sold on an exchange; offered by commercial banks

d.

offered by commercial banks; offered by commercial banks

ANSWER: C Futures are highly standardized and are thus sold on exchanges, whereas forward contracts can be privately negotiated between the parties.

16. LIBOR is: a.

the interest rate commonly charged for loans between banks.

b.

the average inflation rate in European countries.

c.

the maximum loan rate ceiling on loans in the international money market.

d.

the maximum deposit rate ceiling on deposits in the international money market.

e.

the maximum interest rate offered on bonds that are issued in London.

ANSWER: A The London Inter-Bank Offer Rate represents the interest rate at which banks offer to lend funds to one another.

Answers

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