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QUESTION

1. A fixed exchange rate system is analogous to oil markets that are also based on a) prices that are affected by imbalances in supply and demand b) prices that do

1.         A fixed exchange rate system is analogous to oil markets that are also based on

a)         prices that are affected by imbalances in supply and demand

            b)         prices that do not move at all with supply demand imbalances

            c)         quantities of oil supplied and demanded not changing over time

2.         Suppose that the Brazilian Real (BRL) depreciated by 70% against the US dollar (USD). By how much will the USD appreciate against the Brazilian Real (BRL)?

             a)        133%

             b)        233%   Show work 

 c)        333%

3.         Currency risk hedging for international bidding related cashflows is best done by:

a)         currency forwards

            b)         currency futures

            c)         currency options

4.         The Chinese yuan was reset from 8.28 Yuan / $ to 8.11 Yuan / $ in July 2005.  If Unocal (US corporation) had agreed to sell a subsidiary before July for a pre-set price in USD,

            a)         Unocal would receive less in dollars for it after July

            b)         Unocal would receive less in Yuan for it after July

            c)         Unocal would receive more in Yuan on the purchase after July

5.         According to the interest rate parity theory:

a)      currency with the lower interest rate will be at a forward premium

b)         covered interest arbitrage will always be possible

c)         rates of return in dollars from foreign risk-free T-bills are entirely riskless

6.         Hedging foreign currency cash-inflows with currency futures is preferred since:

            a)         the basis risk involved is usually very large

            b)         no payment has to be made upon a margin call

            c)         the hedge is almost perfect with small basis risk

7.         A call option written on a foreign currency without owning the underlying stock:

a)         can subject the call option writer to unlimited losses

            b)         can provide the valuable right of buying the foreign currency

            c)         cannot result in retaining the premium on the call option for option writer

8.         Currency forwards differ from currency futures because currency forwards have:

            a)         daily marking to market and basis risks

            b)         linear payoffs but no daily marking to market

            c)         nonlinear payoffs and an option price or premium

[Part B:  60 points]

Conceptual questions / Numerical problems

1.     Forward-discount calculation:

Suppose the direct 90‑day forward quote for the Danish kroner in Frankfurt is given to you as EUR 0.2943 – 0.2957 / DKK and spot rate as EUR 0.2921 – 0.2948 / DKK. Based on the bid or ask rates, which currency is at a forward-discount with respect to the other currency? How much is this forward discount? [Hint: Use either bid or ask rates]

(6 points)       

a.     Please type formula here:

b.    Please provide the reasoning for your answer:

c.     Calculate the forward-premium here:

2.     Thai baht and dollar

The US dollar (USD) to Thai baht (THB) spot exchange rate was 100 USD = 3231.78 THB in September 2020.  By January 2021 it had moved to 100 USD = 3118.74 THB.  The 30-day forward rate then was 100 USD = 3198.70 THB.

i. Calculate the appreciation / depreciation of the USD versus the THB.  Did the USD appreciate or depreciate against the THB?

ii. What was the interest rate differential between the two currencies in January 2021?

(9 points)

i.               Show calculation for appreciation/depreciation:

Write answer to question here:

ii.             Explain logic for your answer here:

Write answer to question here:

3.     Interest rate parity:

The annual, riskless, nominal interest rate in the Eurozone is [– 0.35%].  The spot rate between the euro (EUR) and the dollar (USD) is USD 1.1074 / EUR and the 90-day forward rate between the euro and the dollar is USD 1.0930 / EUR.  a) What is the annual, riskless, nominal interest rate in the US if interest rate parity holds?

b) What happens if interest rate parity is violated?  Explain. (7 points)

a)     Calculate annual, riskless, nominal interest rate in US:

b)    Answer the question here:

4.     Dow Chemical receives quotes from a foreign currency trader of USD 0.1642 – 0.1657 / PLZ and USD 0.2618 – 0.2646 / DKK.  How many DKK will Dow Chemical pay the trader for a purchase of 100 million PLZ? Explain. (8 points)

Show calculations and answer here:

5.     Currency options

You are a US importer from Japan.  For goods bought in Japan, you are to pay 500 million Japanese yen (JPY) in three months.  You wish to hedge the currency-risk using options.  Please answer the following questions:

a.              What type of currency options on the Japanese yen would you use?  Would you sell them or buy them?

b.              Assuming each JPY currency option has a face value of 12.5 million JPY how many such currency options do you need?

            (10 points)

Answer a.

Answer b.

6.     Forward hedging: As exporter to UK, you will receive 100,000 GBP in 3-months.  If the 3-month forward rate is 1.24 USD / GBP, describe your hedging strategy with this forward contract.  How many USD will you receive by using the hedging strategy? If 3-months from now the spot rate is 1.20 USD/GBP, by using the forward contract you have made an opportunity gain/loss of how many USD?

(5 points)

Hedging strategy and payment in USD:

Opportunity gain/loss calculation and answer:

________________________________________________________________________

7.     Currency futures

i)Describe the daily marking to market process in currency futures markets in two or three sentences [Hint: Use numerical example to illustrate answer if it helps].

ii) What are the two main differences between currency forward/futures contracts and currency options?

(10 points)

Answer i)

Answer ii)

8.     The US (currency: USD) and India (currency: INR) are trading partners.  The INR has been depreciating against the USD from 63.59 INR / USD on Jan 12, 2018, to 70.95 INR / USD on Jan 10, 2020 and to 73.70 INR / USD on Sep 17, 2021.

i)What impact is expected on Indian exports and imports with the US over this time-period? Why?

ii) What impact can an import tax on Indian goods in the US have on US imports of Indian goods? Why?

(5 points)

Answer i):

Answer ii):

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