PFM 7-1

339. Which of the following theories does NOT influence the yield curve?

340. Which of the following measures will allow a France company to enjoy the benefits of a favourable change in exchange rates for their Euro receivables contract while protecting them from unfavourable exchange rate movements?

341. Exporters Co is concerned that the cash received from overseas sales will not be as expected due to exchange rate movements. What type of risk is this?

342. Which of the following derivative instruments are characterised by a standard contract size?

1. Futures contract
2. Exchange-traded option
3. Forward rate agreement
4. Swap

343. What does the term ‘matching’ refer to?

344. Indicate, by clicking in the relevant boxes, whether the following statements concerning currency risk are true or false.

A. Lagging is a method of hedging transaction exposure

B. Matching receipts and payments is a method of hedging translation exposure

345. The current euro/US dollar exchange rate is €1:$2. Collars Co, a Eurozone company, makes a $1,000 sale to a US customer on credit. By the time the customer pays, the euro has strengthened by 20%. What will the euro receipt be (to the nearest euro)?

346. A company whose home currency is the dollar ($) expects to receive 500,000 pesos in 6 months’ time from a customer in a foreign country. The following interest rates and exchange rates are available to the company:

Spot rate                             15.00 peso per $

Six-month forward rate      15.30 peso per $

Working to the nearest $100, what is the 6-month dollar value of the expected receipt using a money market hedge?

347. A US company has just despatched a shipment of goods to Sweden. The sale will be invoiced in Swedish kroner, and payment is to be made in three months’ time. Neither the US exporter nor the Swedish importer uses the forward foreign exchange market to cover exchange risk. If the dollar were to weaken substantially against the Swedish kroner, what would be the foreign exchange gain or loss effects upon the US exporter and the Swedish importer?

Indicate, by clicking in the relevant boxes, which effect would be seen.

A. US exporter

B. Swedish importer

348. Which of the following statements is correct?

349. Southwest plc must pay a Spanish supplier 100,000 euros in three months’ time. The company’s Finance Director wishes to avoid exchange rate exposure, and is looking at four options.

Which of the following options would not provide cover against the exchange rate exposure that Southwest would otherwise suffer?

350. The forward rate is 0.8500 – 0.8650 euros to the 1$. What will a €2,000 receipt be converted to at the forward rate?

351. Which of the following statements are correct?

1 Interest rate options allow the buyer to take advantage of favourable interest rate movements

2 A forward rate agreement does not allow a borrower to benefit from a decrease in interest rates     3 Borrowers hedging against an interest rate increase will buy interest rate futures now and sell them at a future date

352. Indicate, by clicking in the relevant boxes, whether the following statements about interest rate risk hedging are true or false.

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

B. The cost of an interest rate floor is higher than the cost of an interest rate collar

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

353. Which of the following is NOT a limitation of Interest Rate Parity Theory?

354. The following options are held by Collins plc at their expiry date:

(1) A call option on £500,000 in exchange for US$ at an exercise price of £1 = $1.90. The exchange rate at the expiry date is £1 = $1.95.

(2) A put option on £400,000 in exchange for Singapore $ at an exercise price of £1 = $2.90. The exchange rate at the expiry date is £1 = $2.95.

Which of the following combinations (exercise/lapse) should be undertaken by the company?

355. Apostle Co wishes to hedge interest rate movements on a borrowing it intends to make three months from now for a further period of six months. Which TWO of the following will best help Apostle Co hedge its interest rate risk?

356. Which of the following statements concerning the causes of interest rate fluctuations is correct?

357. An investor plans to exchange $1,000 into euros now, invest the resulting euros for 12 months, and then exchange the euros back into dollars at the end of the 12-month period. The spot exchange rate is €1.415 per $1 and the euro interest rate is 2% per year. The dollar interest rate is 1.8% per year. Compared to making a dollar investment for 12 months, at what 12-month forward exchange rate will the investor make neither a loss nor a gain?

358. The current spot exchange rate between sterling and the euro is €1.4415/£. The sterling annual interest rate is 5.75% pa and the euro annual interest rate is 4.75% pa.

What should the three month €/£ forward rate be (to four decimal places)?

359. Which of the following statements is true of a put option?

360. The following statements refer to interest rate futures. Indicate whether each of the following statements is true or false?

361. Which TWO of the following descriptions of basis risk are correct?

362. The current spot rate for the peso (the currency of country P) to the $ (the currency of country A) is 2 peso:$1. Annual interest rates in the two countries are 8% in country P, and 4% in country A. What is the three months forward rate (to four decimal places) in terms of peso to the $?

363. Belinta is a country that has the peso for its currency and Questo is a country that has the dollar ($) for its currency

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?

364. A company that has a $10m loan with a variable rate of interest, has acquired a forward rate agreement (FRA) with a financial institution that offered a 3–6, 3.2% – 2.7% spread.

What would be the payment made to the financial institution under the terms of the FRA if the actual rate of interest was 3% (to the nearest dollar)?

365. Country A uses the dollar as its currency and country B uses the dinar.

Country A’s expected inflation rate is 5% per year, compared to 2% per year in country B. Country B’s nominal interest rate is 4% per year and the current spot exchange rate between the two countries is 1.5000 dinar per $1.

According to the four-way equivalence model, which of the following statements is/are true?

1 Country A’s nominal interest rate should be 7.06% per year

2 The future (expected) spot rate after one year should be 1.4571 dinar per $1

3 Country A’s real interest rate should be higher than that of country B

366. A US company owes a European company €3.5m due to be paid in 3 months’ time. The spot exchange rate is $1.96 – $2:€1 currently. Annual interest rates in the two locations are as follows:

Borrowing         Deposit

US                  8%                   3%

Europe            5%                   1%

What will be the equivalent US$ value of the payment using a money market hedge?