Use the following to answer questions 1 - 5 ABC, Inc. does business in the US and in New Zealand. Their domestic operations will produce cash flow of USD 1 million. In addition, they sell goods and...

Use the following to answer questions 1 - 5

ABC, Inc. does business in the US and in New Zealand. Their domestic operations will produce cash flow of USD 1 million. In addition, they sell goods and services in New Zealand in the amount of NZD 500,000 and purchase supplies in New Zealand in the amount of NZD 600,000. They will continue this practice both this year and next year. They believe the exchange rate will be USD .55/NZD this year but will decline to USD .53 / NZD next year.

Flag this QuestionQuestion 14pts

Based upon the above information your projection for the USD cash flow of ABC NEXT YEAR would be:

Group of answer choicesUSD 525,000USD 945,000Impossible to determine with given informationUSD 947,000Flag this QuestionQuestion 24pts

ABC’s exchange rate exposure is to a _________ New Zealand Dollar.

Group of answer choicesStrongWeakABC has no exposureSteadyFlag this QuestionQuestion 34pts

For every USD ________ change in the value of the NZD, ABC’s USD cash flow changes by USD _________.

Group of answer choices+.01; +1000-.01; +1000+.01; +2000-.02; +1000Flag this QuestionQuestion 44pts

Suppose ABC is considering terminating purchases of supplies in New Zealand and only selling goods and services there. This would have the general effect of ___________ their exposure to Exchange Rate risk.

Group of answer choicesDecreasingThere would be no impact on exchange rate riskNegatingIncreasingFlag this QuestionQuestion 54pts

Which of the following would be the most advisable strategy to reduce exposure exchange rate risk in New Zealand?

Group of answer choicesIncrease SalesBorrow Funds in New ZealandDecrease SalesExpand Purchasing in New ZealandFlag this Question

Use the following to answer questions 6 - 9

DEF, LLC is a US-based MNC that is considering making an investment in the money market in Columbia. The annual rate of return available on money market investments in Columbia is 16% and the current exchange rate is COP 2920 / USD. [COP = Columbian Peso]. Suppose they make the investment and liquidate it in one year at an exchange rate of COP 3009 / USD.

Flag this QuestionQuestion 64pts

What is the rate of return realized by DEF on its investment in the Columbian Money Market?

Group of answer choices18.7%12.6%9.5%16.0%Flag this QuestionQuestion 74pts

The chief risk of such an investment strategy by DEF is:

Group of answer choicesA severe increase in the value of the COP during the investment periodThere is no risk in the strategy employed by DEFA severe weakening of the USD during the investment periodA severe drop in the value of the COP during the investment periodFlag this QuestionQuestion 84pts

One possible way for DEF to reduce the risk of the above strategy would be to:

Group of answer choicesSell COP forward one year at time the investment is madeSell USD forward one year at the time the investment is madeEngage in triangular arbitrage at the time the investment is madeEngage in locational arbitrage after the investment is madeFlag this QuestionQuestion 94pts

Suppose DEF could earn 2% on a USD-denominated investment of the same risk level as the Columbian investment. Their strategy would prove beneficial provided the value of the COP does not ________________ /USD during the investment period.

Group of answer choicesDepreciate to 2750Appreciate to 2900Depreciate to 3322Appreciate to 3155Flag this Question

Use the following to answer questions 10-13

Suppose at a given time foreign exchange markets reflected the following quotations:

JPY / NOK	USD / JPY	NOK / USD
2.0	.01	49

Flag this QuestionQuestion 104pts

The best possible percentage return earned by a US-based investor engaging in Triangular Arbitrage in the above market would be:

Group of answer choices5.08%0%2.04%-3.18%Flag this QuestionQuestion 114pts

Generally speaking, triangular arbitrage is possible when:

Group of answer choicesThe exchange rate implied by USD/FX rates is not equivalent to the Cross Rate of two non-USD currenciesThe interest rate differential among three countries is not reflected in the forward marketThe exchange rate implied by USD/FX rates is equivalent to the Cross Rate of two non-USD currenciesTwo currency dealers are offering different bid-ask spreads for the same currency pairsFlag this QuestionQuestion 124pts

Suppose an investor with USD 1 million used the quotes above to trade currency and obtain NOK (Norwegian Kroner). At the end of the trade, the best outcome would be:

Group of answer choicesNOK 50 MillionNOK 49 MillionNOK 20408NOK 205 MillionFlag this QuestionQuestion 134pts

The terminal effect in FX markets of the above trades by numerous traders would be:

Group of answer choicesReflection of the interest rate differential in the forward marketReflection of the rate of inflation in the spot marketNear uniformity in quotations among various currency tradersEquilibrium in FX markets between USD/FX quotes and non-dollar Cross RatesFlag this Question

Use the following to answer questions 14-18

Suppose 1-year interest rates are 11% in South Africa and 4% in the United States. The current spot rate of the South African Rand (ZAR) is USD 0.12. Forward contracts on ZAR are available with a 7% discount.

Flag this QuestionQuestion 144pts

Does Interest Rate Parity (IRP) exist between the South African Rand and the US Dollar?

Group of answer choicesNo, because investors in both countries can use Covered Interest Arbitrage to earn excess return over their home ratesYes, because the forward discount is not equal to that suggested by the IRP formula

No, because the forward discount is not equal to that suggested by the IRP formula

Yes, because neither investor can use CIA to earn excess return over their home ratesFlag this QuestionQuestion 154pts

Can a US-based investor successfully use Covered Interest Arbitrage in South Africa?

Group of answer choices

No, because they earn less than 4%

No, because they earn less than 11%Yes, because they earn more than 0%Yes, because they earn more than 11%Flag this QuestionQuestion 164pts

Suppose a South African investor attempts covered interest arbitrage and during the year, and the value of the USD remains unchanged. Which of the following is most true?

Group of answer choices

The investor’s cash profit is decreased by the steady USD

None of the choices given are true

The investor’s cash profit is not impacted by any change in the USD during the year

The investor’s cash profit is increased by the steady USD

Flag this QuestionQuestion 174pts

Why – in general – why would an out-of-country investor attempt Covered Interest Arbitrage in the US when their own home rates are higher?

Group of answer choices

The forward discount on the USD is smaller than the rate differential

The forward discount on the USD is a least as large as the rate differential

The forward discount on the USD is a exactly the same as the rate differential

There is no reason to ever attempt Covered Interest Arbitrage in a country with lower ratesFlag this QuestionQuestion 184pts

Suppose you believe the South African Rand (ZAR) will fall in value by 6% during the year. Given the forward contracts noted above, in this case, your best move would be to:

Group of answer choicesThere is no winning strategy in ZAR contracts or investmentsBuy ZAR contracts forwardSell ZAR contracts forwardEngage Covered Interest Arbitrage in ZAR-denominated investmentsFlag this Question

Use the following to answer questions 19-22

PQR Company sources raw materials in Thailand and is concerned about exchange rate exposure to the Thai Baht (THB). The current spot rate of the Thai Baht is USD .039. In the coming year inflation is expected to be 7% in Thailand. The US is expected to experiencedeflation; the expected US Inflation Rate is -0.5%.

Flag this QuestionQuestion 194pts

Suppose PQR is interested in hedging their exposure to the Thai Baht. Which of the following actions would be LEAST appropriate?

Group of answer choicesPurchase Call Options on THBSell THB forwardBuy THB Futures contractsBuy THB forwardFlag this QuestionQuestion 204pts

Suppose PQR will owe their Thai supplier THB 12 million in one year for supplies purchased. If PPP holds, their cash outlay in USD will be approximately:

Group of answer choicesUSD 437,400USD 439,600USD 466,200USD 435,200Flag this QuestionQuestion 214pts

Continue to suppose that PPP holds between the USD and THB and that PQR will owe THB 12 million in one year. Suppose that PQR had hedged their exposure with the purchase of Call Options with an expiration date of 1 year. The Call Options had an exercise price of USD .036 and a Call Premium of USD .0004. In one year, PQR would -

Group of answer choicesAllow the options to expire and pay a net price of USD .036266 per THBExercise the options and pay a net price of USD .036 per THBExercise the options and pay a net price of USD .032 pre THB

Exercise the options and pay a net price of USD .0364 per THB

Flag this QuestionQuestion 224pts

If the International Fisher Effect (IFE) and Interest Rate Parity (IRP) also hold between the Baht and the Dollar, which of the following is MOST true?

Group of answer choices

Buying forward and remaining unhedged will produce the same outcome

Buying forward will produce a more favorable outcome than remaining unhedgedBuying forward will produce a less favorable outcome than remaining unhedgedPPP, IFE & IRP cannot exist simultaneously between the Baht and the DollarFlag this Question

Use the following to answer questions 23, 24 & 25

Suppose a twelve-pack of Michelob Ultra bottles costs USD 13.50 in the United States. The same party costs CAD 18.00 in Canada.

Flag this QuestionQuestion 234pts

By the “Beer Bottle Index” the equilibrium price of a USD at PPP should be:

Group of answer choicesCAD .75CAD 2.6667CAD 1.3333CAD 4.5Flag this QuestionQuestion 244pts

Suppose the actual CAD/USD exchange rate at the time the above prices exist is CAD 1.4286 / USD. By the “Beer Bottle Index” the CAD is ______ by _______ % relative to the USD.

Group of answer choicesUndervalued; 6.67Overvalued; 6.67Overvalued; 6.25Undervalued; 6.25Flag this QuestionQuestion 254pts

Suppose the only product exchanged between the US and Canada is Mich Ultra. The likely outcome of a scenario like the one above would be:

Group of answer choicesAn increase in the demand for CAD and depreciation of CAD relative to the USD

An increase in the supply of USD and appreciation of CAD relative to the USD

A lot of Canadians drunk on beer imported from the USAn increase in the supply of CAD and depreciation of CAD relative to the USD