F9 QUIZ 10 - CHỦ ĐỀ: G. Risk management

The currency of Handria is the peso and the currency of Wengry is the dollar ($). The current spot exchange rate is 1.5134 pesos = $1.

Using interest-rate differentials, the one-year forward exchange rate is 1.5346 pesos = $1.

The currency market between the peso and the dollar is assumed perfect and the International Fisher Effect holds.

Which of the following statements is true?

• A.Wengry has a higher forecast rate of inflation than Handria

• B.Handria has a higher nominal rate of interest than Wengry

• C.Handria has a higher real rate of interest than Wengry

• D.The forecast future spot rate of exchange will differ from the forward exchange rate

A company which limits its overseas operations to exports to foreign countries is exposed to which of the following exchange rate risks?

• A.Transaction, economic and translation risks

• B.Transaction and economic risk only

• C.Economic and translation risks only

• D.Transaction and translation risks only

Which of the following statements about interest rate risk hedging is correct?

• A.An interest rate floor can be used to hedge an expected increase in interest rates

• B.An interest rate collar is usually more cost-effective than an interest rate floor

• C.The premium on an interest rate option is payable when it is exercised

• D.The standardised nature of interest rate futures means that over- and under-hedging can be avoided

Solway International is a US-based company which is due to receive £10,000 in 60 days from a UK customer. The current exchange rate is $1.30 per £1. Solway has purchased a put option to sell £10,000 in 60 days for $1.25 per £1, and has paid a premium of $0.005 per £1.

If 60 days from now the spot exchange rate is $1.20, what will be the net benefit for Solway International compared to not hedging?

• A.$0

• B.$450

• C.$500

• D.$550

In relation to interest rate futures, which of the following statements is correct?

• A.Basis risk arises when the basis in a futures contract amortises at a linear rate

• B.If interest rates rise, the price of interest rate futures falls

• C.Interest rate futures are priced at 100 plus the implied interest rate

• D.When hedging against falling interest rates, futures are sold first and bought later

Hedgehog is a UK-based company which must pay $500,000 to its foreign supplier in 90 days. The current spot rate is $1.60 per £1. Hedgehog purchases an option to buy dollars in 90 days at $1.64 per £1, paying a premium of $0.07 per $1. The spot rate after 90 days is $1.58 per £1.

What will Hedgehog do on the payables’ settlement date?

• A.Hedgehog will exercise the option

• B.Hedgehog will not exercise the option

• C.Hedgehog will be indifferent as to whether it exercises the option or not

• D.Hedgehog will allow the option to lapse

A US importer expects to pay a European supplier €500,000 in three months.

Which of the following hedges could be appropriate for the US importer?

• A.Buying call options on the euro

• B.Buying put options on the euro

• C.Selling put options on the euro

• D.Selling call options on the euro

In evaluating the impact of relative inflation rates on the demand for a foreign currency, which of the following is true?

• A.Inflation is irrelevant to currency demand

• B.As inflation associated with a foreign economy increases in relation to a domestic economy, demand for the foreign currency falls

• C.As inflation associated with a foreign economy increases in relation to a domestic economy, demand for the foreign currency increases

• D.As inflation associated with a foreign economy decreases in relation to a domestic economy, demand for the foreign currency falls

A company has several long-term floating rate loan notes outstanding and is considering hedging interest rate risk.

Which of the following derivative instruments is recommended for this purpose?

• A.Money market hedge

• B.Forward currency contract

• C.Fixed rate bank loans

• D.Interest rate swap

Universal Exports Co limits its operations to exporting overseas.

Which of the following statements about Universal’s exposures to exchange rate risk is correct?

A.Universal is exposed to transaction, economic and translation risks

B.Universal is exposed to transaction and economic risks only

C.Universal is only exposed to transaction risk

D.Universal is not exposed to exchange rate risk as currency fluctuations would balance out over time

• A.Universal is exposed to transaction, economic and translation risks

• B.Universal is exposed to transaction and economic risks only

• C.Universal is only exposed to transaction risk

• D.Universal is not exposed to exchange rate risk as currency fluctuations would balance out over time