Students have to do any 3 questions popped up question

1
Translation exposure reflects the exposure of a firms
a. ongoing international transactions to exchange rate fluctuations
b. parent currency value of receivables and payables denominated
in host currency
c . international cash flow to exchange rate fluctuations
d. financial statements to exchange rate fluctuations
2.
Suppose the spot quote in US on the Deutsche mark is $0.0!"
0.#0$ and the spot quote on the %rench franc is $0.##&0"
0.##'0.(hat is the direct spot quote for the %rench franc in
%rankfurt )*ermany+,
. 0.-.- / 0..00
b.0..0- / 0.-.-
c. 0.#-. / 0.#'&
d. none of the above
3.
1he spot and '0"day forward rates for the 2ound Sterling in US
are $!.03 and $ !.#- respectively. (hat is the forward premium
or discount on the pound,
a. -..# premium
b. 0.&# premium
c. 0.&# discount
d. -..# discount
e. none of the above
0. 4f a firm$ based in the 5etherlands$ wishes to avoid the risk of
exchange rate movements and is due to receive $#00$000 in '0
days$ it could6
a+ 7nter into a '0"day forward purchase of US dollars for
guilders$
b+ 7nter into a '0"day forward sale of US dollars for
guilders8
c+ 5one of the above
-. Suppose you observe the following quotations in 5ew 9ork for
:anadian$ spot ; $0.&000 and months forward; $ .&0-0. 1he
rate of interest in US and :anada are -< and .< per annum
respectively. =ow would an arbitrageur benefit by buying or selling
forward :anadian $,
a. buy forward
b. sell forward
c. no profit
.. Swiss franc in US is $0..- on the spot market and the #&0"days
forward rate is $0.30. 1he annuali>ed interest rates in the United
States and in Swit>erland are < and !< respectively. =ow much
would a speculator gain or lose by selling # million S% #&0 days
forward,
a. gain $0.$&00
b. loss $0&$000
c. gain $0-$&00
d. loss $0.$&00
e. no gain no loss
3. 4f spot quotations for ? in 5ew 9ork $!.00- and . months
forward is $ !.0!-.1he rate of inflation in US and U@ are expected
to be -< and 0< respectively. =ow would an arbitrageur benefit in
the situation,
a. buying ? forward
b. selling ? forward
c. neither
Solution
1. d. financial statements to exchange rate fluctuations
!.
a. = 0.3! " 0.3!0#
(orking
:ross rate for DA to %% in US ; .0! / .##'0 ;!.33- buy rate
;.#0 / .##&0 ; !.&0- sell rate
Direct quote for %% in %rankfurt ; )#/ !.&0-+ / )#/ !.33-+
= 0.3! " 0.3!0#
.
d. none of the above
(orking
%orward premium ; %B CSB /SBD#!/
;!.#- " !.03 / !.#-#D#!/ ; #&..< 2B7A4UA
0.
b+ 7nter into a '0"day forward sale of US dollars for guilders8
-.
a. $uy for%ard
(orking
UE%B ; #.0#!- / #.0#- D.& ;0.3'&
%orward rate is ; .&0-0
%orward rate is biased8 forward rate quoted weak for :anadian $
arbitrageur would buy forward :anadian $
..
d. lose & #!'(00
(orking
UE%B ; #.0#- / #.0# D ..- ; $ 0..-!
%orward rate ; $ 0.3
Selling forward$ the speculator would lose ; ;.3 " ..-! ;0.00.&
per S%
Foss for #m forward ; $0.$&00
3.
a. $uy for%ard
(orking
UE%B ; $!.0#0&
forward rate ;$!.0!-
Euy forward at $!.0!- and gain $0.0#0#3