Question: Explain the difference between sterilized and

> Assume that annual interest rates in the United States are 4 percent, whereas interest rates in France are 6 percent. a. According to IRP, what should the forward rate premium or discount of the euro be? b. If the euro’s spot rate is $1.10, what should

> Blades, Inc., has recently decided to expand its international trade relationship by exporting its roller blades to the United Kingdom. Jogs, Ltd., a British retailer, has committed itself to the annual purchase of 200,000 pairs of Speedos, Bladesâ

> The South African rand has a one-year forward premium of 2 percent. One-year interest rates in the United States are 3 percentage points higher than in South Africa. Based on this information, is covered interest arbitrage possible for a U.S. investor if

> Assume the following information: Given this information, is locational arbitrage possible? If so, explain the steps involved in locational arbitrage, and compute the profit from this arbitrage if you had $1 million to use. What market forces would occu

> Assume that the annual U.S. interest rate is currently 8 percent and Germany’s annual interest rate is currently 9 percent. The euro’s one-year forward rate currently exhibits a discount of 2 percent. a. Does interest rate parity exist? b. Can a U.S. f

> Assume that the one-year U.S. interest rate is 11 percent, whereas the one-year interest rate in Malaysia is 40 percent. Assume that a U.S. bank is willing to purchase the currency of that country from you one year from now at a discount of 13 percent. W

> The one-year interest rate in New Zealand is 6 percent. The one-year U.S. interest rate is 10 percent. The spot rate of the New Zealand dollar (NZ$) is $0.50. The forward rate of the New Zealand dollar is $0.54. Is covered interest arbitrage feasible for

> If the relationship that is specified by interest rate parity does not exist at any period but does exist on average, then covered interest arbitrage should not be considered by U.S. firms. Do you agree or disagree with this statement? Explain.

> Assume that the forward rate premium of the euro was higher last month than it is today. What does this imply about interest rate differentials between the United States and Europe today compared to those last month?

> Assume that the Japanese yen’s forward rate currently exhibits a premium of 6 percent and that interest rate parity exists. If U.S. interest rates decrease, how must this premium change to maintain interest rate parity? Why might we expect the premium to

> Consider investors who invest in either U.S. or British one-year Treasury bills. Assume zero transaction costs and no taxes. a. If interest rate parity exists, then the return for U.S. investors who use covered interest arbitrage will be the same as the

> Why would U.S. investors consider covered interest arbitrage in France when the interest rate on euros in France is lower than the U.S. interest rate?

> At the current time, the Sports Exports Company is willing to receive payments in British pounds for the monthly exports it sends to the United Kingdom. Although all of its receivables are denominated in pounds, it has no payables in pounds or in any oth

> Why do you think the Indonesia rupiah was more exposed to an abrupt decline in value than the Japanese yen during the Asian crisis (even if the home countries’ economies experienced the same degree of weakness)?

> Assume that the existing U.S. one-year interest rate is 10 percent and the Canadian one-year interest rate is 11 percent. Also assume that interest rate parity exists. Should the forward rate of the Canadian dollar exhibit a discount or a premium? If U.S

> Why do you think currencies of countries with high inflation rates tend to have forward discounts?

> Explain the concept of locational arbitrage and the scenario necessary for it to be plausible.

> The Hong Kong dollar’s value is tied to the U.S. dollar. Explain how the following trade patterns would be affected by the appreciation of the Japanese yen against the dollar: (a) Hong Kong exports to Japan and (b) Hong Kong exports to the United State

> Why would the Fed’s indirect intervention have a stronger impact on some currencies than on others? Why would a central bank’s indirect intervention have a stronger impact than its direct intervention does?

> Explain the potential feedback effects of a currency’s changing value on inflation.

> What is the impact of a weak home currency on the home economy, other things being equal? What is the impact of a strong home currency on the home economy, other things being equal?

> Assume there is concern that the United States may experience a recession. How should the Federal Reserve influence the dollar to prevent a recession? How might U.S. exporters react to this policy (favorably or unfavorably)? What about U.S. importing fir

> How can a central bank use indirect intervention to change the value of its home currency?

> a. Explain why one country abandoning the euro could reduce the value of the euro, even if that country accounts for a very small proportion of the total production among all eurozone participants. b. Explain why one country abandoning the euro could af

> Blades, Inc., is currently exporting roller blades to Thailand and importing certain components needed to manufacture roller blades from that country. Under a fixed contractual agreement, Blades’ primary customerin Thailand at a cost of

> a. Explain the dilemma that the ECB faces as it attempts to help countries with large budget deficits. b. Describe the types of conditions that the ECB requires when providing credit to countries that need to resolve their budget deficit problems. c. W

> a. Assume that the Federal Reserve engages in intervention by exchanging a very large amount of Canadian dollars for U.S. dollars in the foreign exchange market. Will this action increase, reduce, or have no effect on Canadian inflation? Briefly explain.

> Assume that the United States has a weak economy and that the Fed wants to correct this problem by adjusting the value of the dollar. The Fed is not worried about inflation. Assume that the eurozone has a somewhat similar economic situation as the United

> How can a central bank use direct intervention to change the value of a currency? Explain why a central bank may desire to smooth the exchange rate movements of its currency.

> Assume that France wants to change the prevailing spot rate of its currency (euro) so as to improve its economy; likewise, Switzerland wants to change the prevailing value of its currency (Swiss franc) so as to improve its economy. Which of these two cou

> The United States, Argentina, and Canada commonly engage in international trade with each other. All the products traded can easily be produced in all three countries. The traded products are always invoiced in the exporting country’s currency. Assume th

> Interest rate parity exists and will continue to exist. The one-year interest rate in the United States and in the eurozone is 6 percent and will continue to be 6 percent. Assume that Denmark’s currency (called the krone) is currently pegged to the euro

> The inflation rate in Yinland was 14 percent last year. The government of Yinland just devalued its currency (the yin) by 40 percent against the dollar. Even though it produces products similar to those of the United States, Yinland has much trade with t

> Assume that Canada decides to peg its currency (the Canadian dollar) to the U.S. dollar and that the exchange rate will remain fixed. Assume that Canada commonly obtains its imports from the United States and Mexico. The United States commonly obtains it

> The country of Zapakar has much international trade with the United States and other countries, as it has no significant barriers on trade or capital flows. Many firms in Zapakar export common products (denominated in Zapakar’s currency, called zaps) tha

> The Sports Exports Company converts British pounds into dollars every month. The prevailing spot rate is about $1.65, but there is much uncertainty about the future value of the pound. Jim Logan, owner of the Sports Exports Company, expects that British

> Assume the Hong Kong dollar (HK$) value is tied to the U.S. dollar and will remain tied to the U.S. dollar. Last month, one HK$ 5 0.25 Singapore dollar. Today, one HK$ 5 0.30 Singapore dollar. Assume that much trade in the computer industry occurs among

> Assume that you expect the European Central Bank to engage in central bank intervention by using euros to purchase a substantial amount of U.S. dollars in the foreign exchange market over the next month. Assume that this direct intervention is expected t

> As of 10:00 a.m., the premium on a specific one-year call option on British pounds is $0.04. Assume that the Bank of England had not been intervening in the foreign exchange markets in the last several months. However, it announces at 10:01 a.m. that it

> Assume that the central bank of the country Zakow periodically intervenes in the foreign exchange market to prevent large upward or downward fluctuations in its currency (the zak) against the U.S. dollar. Today, the central bank announced that it would n

> Assume that Belgium, one of the European countries that uses the euro as its currency, would prefer that its currency depreciate against the U.S. dollar. Can it apply central bank intervention to achieve this objective? Explain.

> Why might a country suddenly decide to peg its currency to the dollar or some other currency? When a currency is unable to maintain the peg, which forces usually act to break the peg?

> Assume you have a subsidiary in Australia. The subsidiary sells mobile homes to local consumers in Australia, who buy the homes using mostly borrowed funds from local banks. Your subsidiary purchases all of its materials from Hong Kong. The Hong Kong dol

> Within a few days after the September 11, 2001, terrorist attack on the United States, the Federal Reserve reduced short-term interest rates to stimulate the U.S. economy. How might this action have affected the foreign flow of funds into the United Stat

> During the Asian crisis (see Appendix 6 at the end of this chapter), some Asian central banks raised their interest rates to prevent their currencies from weakening. Yet the currencies weakened anyway. Offer your opinion as to why the central banks’ effo

> During the Asian crisis (see Appendix 6 at the end of this chapter), some Asian central banks raised their interest rates to prevent their currencies from weakening. Yet the currencies weakened anyway. Offer your opinion as to why the central banks’ effo

> Recall that Blades, Inc., the U.S.-based manufacturer of roller blades, is currently both exporting to and importing from Thailand. Ben Holt, Blades’ chief financial officer (CFO), and you, a financial analyst at Blades, are reasonably happy with Blades’

> Should the governments of Asian countries allow their currencies to float freely? What would be the advantages of letting their currencies float freely? What would be the disadvantages?

> Suppose that the government of Chile reduces one of its key interest rates. The values of several other Latin American currencies are expected to change substantially against the Chilean peso in response to the news. a. Explain why other Latin American

> If most countries in Europe experience a recession, how might the European Central Bank use direct intervention to stimulate economic growth?

> U.S. bond prices are usually inversely related to U.S. inflation. If the Fed planned to use intervention to weaken the dollar, how might bond prices be affected?

> Compare and contrast the fixed, freely floating, and managed float exchange rate systems. What are some advantages and disadvantages of a freely floating exchange rate system versus a fixed exchange rate system?

> List the factors that affect currency put option premiums, and briefly explain the relationship that exists for each

> List the factors that affect currency call option premiums, and briefly explain the relationship that exists for each. Do you think an at-the-money call option in euros has a higher or lower premium than an at-the-money call option in Mexican pesos (assu

> When should a speculator purchase a call option on Australian dollars? When should a speculator purchase a put option on Australian dollars?

> When would a U.S. firm consider purchasing a call option on euros for hedging? When would a U.S. firm consider purchasing a put option on euros for hedging

> The “Market” section of the Bloomberg website (www .bloomberg.com) provides interest rate quotations for numerous currencies. 1. Review the section of the website that provides interest rates for various countries (look under Rates & Bonds). Determine t

> How can a forward contract backfire?

> Assume that Australia’s central bank announced plans to stabilize the Australian dollar (A$) in the foreign exchange markets. In response to this announcement, the expected volatility of the A$ declined immediately. However, the spot rate of the A$ remai

> The spot rate of the New Zealand dollar is $0.77. A call option on New Zealand dollars with a one-year expiration date has an exercise price of $0.78 and a premium of $0.04. A put option on New Zealand dollars at the money with a one-year expiration date

> Assume that one year ago, the spot rate of the British pound was $1.70, and the one-year futures contract of the British pound exhibited a discount of 6 percent. At that time, you sold futures contracts on pounds, representing a total of £1,000,000. From

> At 10:30 a.m., the media reported news that the Mexican government’s political problems had decreased, which reduced the expected volatility of the Mexican peso against the dollar over the next month. The spot rate of the Mexican peso was $0.13 as of 10

> Compute the forward discount or premium for the Mexican peso whose 90-day forward rate is $0.102 and spot rate is $0.10. State whether your answer is a discount or premium.

> This morning, a Canadian dollar call option contract has a $0.71 strike price, a premium of $0.02, and an expiration date of one month from now. This afternoon, news about international economic conditions increased the level of uncertainty surrounding t

> On July 2, the two-month futures rate of the Mexican peso contained a 2 percent discount (unannualized). A call option on pesos was available with an exercise price that was equal to the spot rate. In addition, a put option on pesos was available with an

> Two British pound (£) put options are available with exercise prices of $1.60 and $1.62. The premiums associated with these options are $0.03 and $0.04 per unit, respectively. (See Appendix B in this chapter.) a. Describe how a bull spread

> A call option on British pounds (£) exists with a strike price of $1.56 and a premium of $0.08 per unit. Another call option on British pounds has a strike price of $1.59 and a premium of $0.06 per unit. (See Appendix B in this chapter.) Com

> Blades, the U.S.-based roller blades manufacturer, is currently both exporting to and importing from Thailand. The company has chosen Thailand as an export target for its primary product, Speedos, because of Thailand’s growth prospects and the lack of co

> Barry Egan is a currency speculator. Barry believes that the Japanese yen will fluctuate widely against the U.S. dollar in the coming month. Currently, one-month call options on Japanese yen (¥) are available with a strike price of $0.0085 and a premium

> For the following options available on Australian dollars (A$), construct a worksheet and contingency graph for a long strangle. Locate the break-even points for this strangle. (See Appendix B in this chapter.) Put option strike price 5 $0.67. Call opt

> The following information is currently available for Canadian dollar (C$) options (see Appendix B in this chapter): Put option exercise price 5 $0.75. Put option premium 5 $0.014 per unit. Call option exercise price 5 $0.76. Call option premium 5 $0.

> Refer to the previous question, but assume that the call and put option premiums are $0.035 per unit and $0.025 per unit, respectively. (See Appendix B in this chapter.) a. Construct a contingency graph for a long pound strangle. b. Construct a continge

> Assume the following options are currently available for British pounds (£): Call option premium on Britishpounds 5$0.04 perunit. Put option premium on British pounds5$0.03 perunit. Call option strike price $ 5 1.56. Put option strike price $ 5 1.53.

> Maggie Hawthorne is a currency speculator. She has noticed that recently the euro has appreciated substantially against the U.S. dollar. The current exchange rate of the euro is $1.15. After reading a variety of articles on the subject, Maggie believes t

> Differentiate between a currency call option and a currency put option.

> The current spot rate of the Singapore dollar (S$) is $0.50. The following option information is available: Call option premium on Singapore dollar (S$) $ 5 0.015. Put option premium on Singapore dollar (S$) $ 5 0.009. Call and put option strike price $

> Refer to the previous question, but assume that the call and put option premiums are $0.02 per unit and $0.015 per unit, respectively. (See Appendix B in this chapter.) a. Construct a contingency graph for a long euro straddle. b. Construct a contingency

> Reska, Inc., has constructed a long euro straddle. A call option on euros with an exercise price of $1.10 has a premium of $0.025 per unit. A euro put option has a premium of $0.017 per unit. Some possible euro values at option expiration are

> During the Asian crisis, the currencies of many Asian countries declined even though their governments attempted to intervene with direct intervention or by raising interest rates. Given that the abrupt depreciation of the currencies was attributed to an

> Myrtle Beach Co. purchases imports that have a price of 400,000 Singapore dollars, and it has to pay for the imports in 90 days. It can purchase a 90-day forward contract on Singapore dollars at $0.50 or purchase a call option contract on Singapore dolla

> One year ago, you sold a put option on 100,000 euros with an expiration date of one year. You received a premium on the put option of $0.04 per unit; the exercise price was $1.22. Assume that one year ago, the spot rate of the euro was $1.20, the one-yea

> Currency futures markets are commonly used as a means of capitalizing on shifts in currency values, because the value of a futures contract tends to move in line with the change in the corresponding currency value. Recently, many currencies have apprecia

> A U.S. professional football team plans to play an exhibition game in the United Kingdom next year. Assume that all expenses will be paid by the British government, and that the team will receive a check for 1 million pounds. The team anticipates that th

> Bulldog, Inc., has sold Australian dollar put options at a premium of $0.01 per unit, and an exercise price of $0.76 per unit. It has forecasted the Australian dollar’s lowest level over the period of concern as shown in the following t

> Bama Corp. has sold British pound call options for speculative purposes. The option premium was $0.06 per unit, and the exercise price was $1.58. Bama will purchase the pounds on the day the options are exercised (if the options are exercised) to fulfill

> Auburn Co. has purchased Canadian dollar put options for speculative purposes. Each option was purchased for a premium of $0.02 per unit, with an exercise price of $0.86 per unit. Auburn Co. will purchase the Canadian dollars just before it exercises the

> How can corporations use currency futures? b. How can speculators use currency futures?

> LSU Corp. purchased Canadian dollar call options for speculative purposes. If these options are exercised, LSU will immediately sell the Canadian dollars in the spot market. Each option was purchased for a premium of $0.03 per unit, with an exercise pric

> Assume that a March futures contract on Mexican pesos was available in January for $0.09 per unit. Also assume that forward contracts were available for the same settlement date at a price of $0.092 per peso. How could speculators capitalize on this situ

> Why do you think the depreciation of the Asian currencies adversely affected U.S. firms? (There are at least three reasons, each related to a different type of exposure of some U.S. firms to exchange rate risk.)

> Assume that on November 1, the spot rate of the British pound was $1.58 and the price on a December futures contract was $1.59. Assume that the pound depreciated during November so that by November 30 it was worth $1.51. a. What do you think happened to

> Assume that the transactions listed in the first column of the following table are anticipated by U.S. firms that have no other foreign transactions. Place an “X” in the table wherever you see possible ways to hedge ea

> Assume that the euro’s spot rate has moved in cycles over time. How might you try to use futures contracts on euros to capitalize on this tendency? How could you determine whether such a strategy would have been profitable in previous periods?

> What are the advantages and disadvantages to a U.S. corporation that uses currency options on euros rather than a forward contract on euros to hedge its exposure in euros? Explain why an MNC might use forward contracts to hedge committed transactions and

> Brian Tull sold a put option on Canadian dollars for $0.03 per unit. The strike price was $0.75, and the spot rate at the time the option was exercised was $0.72. Assume Brian immediately sold the Canadian dollars received when the option was exercised.

> Mike Suerth sold a call option on Canadian dollars for $0.01 per unit. The strike price was $0.76, and the spot rate at the time the option was exercised was $0.82. Assume Mike did not obtain Canadian dollars until the option was exercised. Also assume t

> Alice Duever purchased a put option on British pounds for $0.04 per unit. The strike price was $1.80,and the spot rate at the time the pound option was exercised was $1.59. Assume there are 31,250 units in a British pound option. What was Alice’s net pro

> Randy Rudecki purchased a call option on British pounds for $0.02 per unit. The strike price was $1.45, and the spot rate at the time the option was exercised was $1.46. Assume there are 31,250 units in a British pound option. What was Randy’s net profit

> Compare and contrast forward and futures contracts

> Assume that substantial capital flows occur among Canada, the United States, and Japan. If the interest rate in Canada declines to a level below the U.S. interest rate, and inflationary expectations remain unchanged, how could this affect the value of th