FM-Ch-14 (Interest rate risk)

Mallett Co is an Australian firm currently manufacturing a large item of machinery, which is due to be exported shortly to the United States. The sale has been priced in US dollars, the client is expected to pay 850,000 USD.

This is Mallett Co's first sale to an American client since most of its exports normally go to Asia. The client has agreed to pay Mallett Co three months from now. The following relevant additional information is available.
What will be the Australian dollar receipt, to the nearest thousand dollars, if the transaction is hedged using the money market?
......AUD

• 1,174,000

• 1,174,001

• 1,184,000

• 1,175,000

Mallett Co is an Australian firm currently manufacturing a large item of machinery, which is due to be exported shortly to the United States. The sale has been priced in US dollars, the client is expected to pay 850,000 USD.

This is Mallett Co's first sale to an American client since most of its exports normally go to Asia. The client has agreed to pay Mallett Co three months from now. The following relevant additional information is available.
What will be the Australian dollar receipt, to the nearest thousand dollars, if the transaction is hedged using the money market?
Which of the following relationships suggests that current long-term interest rates can be used to predict future short-term interest rates?

• Expectations theory

• Fisher effect

• Interest rate parity.

• Purchasing power parity

Mallett Co is an Australian firm currently manufacturing a large item of machinery, which is due to be exported shortly to the United States. The sale has been priced in US dollars, the client is expected to pay 850,000 USD.

This is Mallett Co's first sale to an American client since most of its exports normally go to Asia. The client has agreed to pay Mallett Co three months from now. The following relevant additional information is available.
What will be the Australian dollar receipt, to the nearest thousand dollars, if the transaction is hedged using the money market?
What is the 3-month forward exchange rate, to four decimal places?
........................US dollars to the Australian dollar

• 0.7240

• 0.7241

• 0.7242

• 0.7243

Mallett Co is an Australian firm currently manufacturing a large item of machinery, which is due to be exported shortly to the United States. The sale has been priced in US dollars, the client is expected to pay 850,000 USD.

This is Mallett Co's first sale to an American client since most of its exports normally go to Asia. The client has agreed to pay Mallett Co three months from now. The following relevant additional information is available.
What will be the Australian dollar receipt, to the nearest thousand dollars, if the transaction is hedged using the money market?
One risk that a company which exports and imports may face is that of exchange losses when accounting results of its foreign branches or subsidiaries are converted into home currency.

What is the name usually given to this type of risk?

• Economic risk

• Political risk

• Transaction risk

• Translation risk

Mallett Co is an Australian firm currently manufacturing a large item of machinery, which is due to be exported shortly to the United States. The sale has been priced in US dollars, the client is expected to pay 850,000 USD.

This is Mallett Co's first sale to an American client since most of its exports normally go to Asia. The client has agreed to pay Mallett Co three months from now. The following relevant additional information is available.
What will be the Australian dollar receipt, to the nearest thousand dollars, if the transaction is hedged using the money market?
Why is a currency option a particularly suitable device to reduce exposure to currency movements when tendering for a contract priced in a foreign currency?

• Cheapest means of achieving a hedge

• Least risky means of achieving a hedge

• Least unfavourable effect in the published accounts

• You may not get the contract and therefore the currency

Noon Co, a company based in Centreland whose home currency is the Centreland Colon (CC), has been regularly buying components from and selling finished products to businesses in Flyland, where the currency is the Flyland Franc (FF).

One particular payment of 3,000,000 Flyland Francs has to be made by Noon Co to a supplier in Flyland in three months' time. The following information is available.
What is the cost in Centreland Colons of a forward market hedge?

• 471,550 CC

• 474,608 CC

• 483,092 CC

• 486,224 CC

Noon Co, a company based in Centreland whose home currency is the Centreland Colon (CC), has been regularly buying components from and selling finished products to businesses in Flyland, where the currency is the Flyland Franc (FF).

One particular payment of 3,000,000 Flyland Francs has to be made by Noon Co to a supplier in Flyland in three months' time. The following information is available.
What is the cost in Centreland Colons of a forward market hedge?
Which of the following relationships attempt to explain the difference between. forward and spot rates of exchange between two currencies and the relative rates of interest in the countries of origin of the two currencies?

• Expectations theory

• Fisher effect

• Interest rate parity

• Purchasing power parity

Noon Co, a company based in Centreland whose home currency is the Centreland Colon (CC), has been regularly buying components from and selling finished products to businesses in Flyland, where the currency is the Flyland Franc (FF).

One particular payment of 3,000,000 Flyland Francs has to be made by Noon Co to a supplier in Flyland in three months' time. The following information is available.
What is the cost in Centreland Colons of a forward market hedge?

• 428,391 CC

• 463,091 CC

• 470,349 CC

• 479,874 CC

Noon Co, a company based in Centreland whose home currency is the Centreland Colon (CC), has been regularly buying components from and selling finished products to businesses in Flyland, where the currency is the Flyland Franc (FF).

One particular payment of 3,000,000 Flyland Francs has to be made by Noon Co to a supplier in Flyland in three months' time. The following information is available.
Indicate, by clicking in the relevant boxes, whether the following statements on the characteristics of interest rate futures are true or false.

(1) Amounts and periods are standardised

(2) They are legally binding contracts

(3) They can be bought and sold on a secondary market

(4) They can be used both to hedge risks and to speculate on interest rate movements

• (1) Correct
  (2) Correct
  (3)Correct
  (4) Correct

• (1) InCorrect
  (2) Correct
  (3) InCorrect
  (4) Correct

• (1) InCorrect
  (2) Correct
  (3) InCorrect
  (4) InCorrect

• (1) InCorrect
  (2) InCorrect
  (3) InCorrect
  (4) Correct

Noon Co, a company based in Centreland whose home currency is the Centreland Colon (CC), has been regularly buying components from and selling finished products to businesses in Flyland, where the currency is the Flyland Franc (FF).

One particular payment of 3,000,000 Flyland Francs has to be made by Noon Co to a supplier in Flyland in three months' time. The following information is available.
If inflation is currently running at 3.8% per year in Centreland, what (to the nearest 1%) is the implied inflation rate in Flyland?

• 14%

• 16%

• 17%

• 13%