Students have to do any 3 questions popped up question

1 Translation exposure reflects the exposure of a firm’s a. ongoing international transactions to exchange rate fluctuationsb. parent currency value of receivables and payables denominated in host currencyc . international cash flow to exchange rate fluctuationsd. financial statements to exchange rate fluctuations

2.Suppose the spot quote in US on the Deutsche mark is $0.3302-0.3310, and the spot quote on the French franc is $0.1180-0.1190.What is the direct spot quote for the French franc in Frankfurt (Germany)? . 0.3565 / 0.3604b.0.3605 / 0.3565c. 0.3156 / 0.3198d. none of the above

3. The spot and 90-day forward rates for the Pound Sterling in US are $2.037 and $ 2.135 respectively. What is the forward premium or discount on the pound?

a. 5.61 premiumb. 4.81 premiumc. 4.81 discountd. 5.61 discounte. none of the above

4. If a firm, based in the Netherlands, wishes to avoid the risk of exchange rate movements and is due to receive $100,000 in 90 days, it could:

a) Enter into a 90-day forward purchase of US dollars for guilders,

b) Enter into a 90-day forward sale of US dollars for guilders; c) None of the above

5. Suppose you observe the following quotations in New York for Canadian$ spot = $0.8000 and 3 months forward= $ .8050. The rate of interest in US and Canada are 5% and 6% per annum respectively. How would an arbitrageur benefit by buying or selling forward Canadian $?a. buy forward b. sell forwardc. no profit

6. Swiss franc in US is $0.65 on the spot market and the 180-days forward rate is $0.70. The annualized interest rates in the United States and in Switzerland are 3% and 2% respectively. How much would a speculator gain or lose by selling 1 million SF 180 days forward?

a. gain $46,800b. loss $48,400c. gain $45,800d. loss $46,800e. no gain no loss

7. If spot quotations for £ in New York $2.005 and 6 months forward is $ 2.025.The rate of inflation in US and UK are expected to be 5% and 4% respectively. How would an arbitrageur benefit in the situation?a. buying £ forwardb. selling £ forwardc. neither

Solution1. d. financial statements to exchange rate fluctuations

2. a. = 0.3565 / 0.3604Working Cross rate for DM to FF in US = .3302 / .1190 =2.775 buy rate =.3310 / .1180 = 2.805 sell rateDirect quote for FF in Frankfurt = (1/ 2.805) / (1/ 2.775) = 0.3565 / 0.3604

3. d. none of the aboveWorkingForward premium = FR –SR /SR*12/ 3 =2.135 - 2.037 / 2.1351*12/ 3= 18.36% PREMIUM

4. b) Enter into a 90-day forward sale of US dollars for guilders;

5.a. buy forward Working UBFR = 1.0125 / 1.015 *.8 =0.798Forward rate is = .8050Forward rate is biased; forward rate quoted weak for Canadian $ arbitrageur would buy forward Canadian $

6.d. lose $ 46,800WorkingUBFR = 1.015 / 1.01 * .65 = $ 0.6532Forward rate = $ 0.7Selling forward, the speculator would lose = =.7 - .6532 =0.0468 per SFLoss for 1m forward = $46,800

7.a. buy forward WorkingUBFR = $2.01483forward rate =$2.025Buy forward at $2.025 and gain $0.01017