Foreign Currency Risk

FOREIGN CURRENCY RISKQ1. Jack is a UK ground car exporter who exports luxury cars and has a competitor in Germany he has recently seen a change in outside bills that pound () of UK has strengthen against euro () of Germany. What is the type of pretend does Jack represent in his rail line? (MCQ)Credit happenTranslation Risk economical Risk Trans bodily process Risk(2 marks)Q2. Yarn Co is multinational business & wants its immaterial subsidiary financial contentions. They argon devising exchange losings when the musical scoreing results of its foreign subsidiary be translated into the domicile notes. Which type of bills risk does Yarn Co face? (MCQ)Netting off RiskTranslation Risk Economic Risk Hedging Risk(2 marks)Q3. Saito Co, a regular army based fish exporter has contest with Sakkara Co based in Bangladesh. He believes he faces an economic risk in the business. What type of impact does it draw on Saito Co? (MCQ)Direct ImpactIndirect ImpactPolitical ImpactEcono mic Impact(2 marks)Q4. The stream spot footstep of UK () to USA ($) is 3$1.5. The shoot-to doe with place per annum are UK 5% & USA 9%. What leave behind be the two-month beforehand array (to the nearest two decimal places)? (FIB)4013204318000 $1(2 marks)Q5. The current spot position of UK () is 3. The rising prices lay per annum of UK is 3% & the expected future six-month spot rate is 3.06. presage the foreign annual inflation rate? (FIB)501656223000%(2 marks)Q6. Which of the sideline instructions relates to International fisherman Effect? (MCQ)The exchange evaluate of countries depending on inflation rateThe exchange place of countries depending on interest pass judgmentPrices are same to different customers in an economyNominal interest rate differentials betwixt countries digest an unbiased predictor of future changes in spot exchange rates.(2 marks)Q7. Which of the following differences volition result in an candidate Theory? (MRQ)The difference in Inflat ion RatesDifference between Spot & introductory RatesThe difference of Interest RatesDifference between Spot & Future Rates(2 marks)Q8. Select the assume theory with the following statements. (P&D)Depreciation of in fronting rates will be callable to high-interest rates Differences in nominal rates due inflation rates A commodity is priced same in every realm The forward rate is a light predictor of the spot rate in the future EXPECTATION speculation PURCHASING POWER PARITY system INTERNATIONAL FISHER EFFECT INTEREST drift PARITY THEORY(2 marks)Q9. bench Co. operates in the USA. They will be receiving a recompense of 2,500 from customers in 4 months meter. project Patio Co.s receipts in four months time? single-valued function the following rates. (MCQ)Spot Rate 1.4/$ 1.6/$4 Month Forward Rate 1.8/$ 2.0/$$1,786$1,563$1,389$1,250(2 marks)Q10. bust Co is a USA based play along imports Robots from China. The usual creed period is cardinal months. Fray Co has to pa y 60,000. Calculate the injury/gain of the defrayal on forwarding contract? (MCQ)Spot Rate 1.321/$ 1.521/$3 Month Forward Rate 1.654/$ 1.854/$$7,085 (Loss)$9,144 (Loss)$9,144 (Gain)$7,085 (Gain)(2 marks)Q11. PXG Co, a UK based telephoner has make $3,600 sale to its USA customer on credit. The current /$ exchange rate is 6.4/$12.8. It is expected that UK will strengthen by 15%, by the time USA customer pays. Calculate the receipts in ? (MCQ)244.57281.25489.13562.5(2 marks)Q12. The dollar is quoted at a $0.067 premium for the forward rate. The current exchange rate is $/ 1.0005 +/- 0.0045. What will a $4,900 stipend convert at forwarding rate? (MCQ)4,8764,9205,2245,274(2 marks)Q13. A UK based gild Bib Co will receive a foreign payment of $2,000 in four months time. The spot rate is $1.1/ $1.4/. Calculate the income in four months time using money mart hedging? (MCQ) usurp DepositDollar ($) 4% 5%Pounds () 3% 2%1,414.41,419.41,8001,807(2 marks)This information is custom for Q 14, Q15 Q16.A USA based company has to make a payment of 95,000 in nine months time. The spot rate is 2.2/$ 2.5/$. Following details areBorrow DepositDollar ($) 7% 5%Pounds () 5% 3%Q14. Calculate the foreign payment using money market hedging? (MCQ) $37,164$42,232$43,816$44,449(2 marks)Q15. Calculate the foreign payment if the nine-month forward rate is 2.37/$ 2.71/$? (FIB)3511551206500$ (2 marks)Q16. Calculate the gain/loss for the company for non leading the payment? (MCQ)$4,365 (Gain)$4,365 (Loss)$3,816 (Loss)$3,816 (Gain)(2 marks)Q17. Following statements relate to Forwarding contracts. (HA)An immediate attach contract TRUE dishonestThe forward rate is variable in record TRUE FALSEThe timing of the contract is unkat oncen TRUE FALSE(2 marks)Q18. A company wants to reduce its doing risks when conducting business with foreign receivables/payables. Following statements are tell by the directors during this yrs AGM. Select the appropriate statements to reduce the risk. (MR Q) The company should hold choke off its payments for few months, this technique is LeadingThe company should continue as conventionI have more or less friends offshore who work in a bank, I may able to arrange a foreign count for the company said by a directorThe company should cut in the foreign currency only (2 marks)Q19. Juab Co is a manufacturing company has a foreign supplier who supplies raw materials. Recently the supplier has now become a customer as well, who purchases Juab Co.s finished products and sells in his single country. Which technique of reducing risk is applicable for Juab Co? (MCQ) Money market contractLeading & LaggingForward market hedgingMatching & Netting(2 marks)Q20. Which of the following statements are true in relation to futures? (MRQ)Currency futures are bar contractsA high premium is paid initiallyFutures are available in all currencies offered by the bankFuture contracts are binding (2 marks)Q21. A company wants to hedging itself from any cur rency risk. They have decided to hedge themselves using currency futures. They have to make a payment in May of $36,000. The futures have a contract size of $15,000. Which of the following futures will they select? (MCQ)Buy three futures on MarchSell two futures of MarchBuy two futures of JuneBuy three futures of September(2 marks)Q22. Select the appropriate plectron in relation to futures. (HA) Transaction cost is lowest value DISADVANTAGEContracts are limited to some currencies ADVANTAGE DISADVANTAGEThe exact date does not have to be known ADVANTAGE DISADVANTAGE(2 marks)Q23. Picots Co is UK based company which has a lot of foreign customers. It will be receiving a payment from USA based customer of $500,000 in five months. The company has been advised to use derivatives to hedge themselves against any currency risk. If they opt for currency options which of the following are correct? (MCQ)Buying a USA $ call option in the UKBuying a USA $ put option in the UKBuying a UK call o ption in the USABuying a UK put option in the USA (2 marks)Q24. Which of the following statements relate to currency options? (MRQ)In future the market becomes favorable and the company will face a loss because it is bound to the contractThey are negotiated Cannot be traded in all currenciesEasily arranged & Flexible (2 marks)Q25. Which of the following is incorrect for swaps? (MCQ)It is negotiated between two parties having their own spot rateIt has a nominal costIt is an over the counter dealIt has ten-fold markets (2 marks)Q26. Which of the following has a refundable cost? (MCQ)Currency FuturesForward ContractsCurrency OptionsCurrency Swaps(2 marks)FOREIGN CURRENCY RISK (ANSWERS)Q1. CEconomic risk is the variation in the value of the business due to unexpected changes in exchange rates. This is an indirect impact on Jacks business.Q2. BThey are making exchange losses when the accounting results of its foreign subsidiary are translated into the home currency. This is an indicati on of Translation Risk.Q3. AIt is a direct impact on Saito Co as the USA being home currency strengthens then foreign competitors Sakkara Co in Bangladesh is able to gain sales at your spending because your fish have become more expensive in the eye of customers both abroad and at home.Q4. 3.02Interest rate parity theory = 3 1+(9% 212)1+(5% 212) = 3.02Q5. 7%Purchasing power parity theory = 3 1+(x% 612)1+(3% 612) = 3.06X% = 7%Q6. DThe exchange rates of countries depending on inflation rates (Purchasing Power Parity Theory)The exchange rates of countries depending on interest rates (Interest Rate Parity Theory)Prices are same to different customers in an economy. The jurisprudence of one price. (Purchasing Power Parity Theory)Nominal interest rate differentials between countries provide an unbiased predictor of future changes in spot exchange rates. (International pekan Effect)Q7. When these two will become equal, Expectation Theory arises. Difference between Spot & Forward Rat esDifference between Spot & Future RatesQ8.Depreciation of forwarding rates will be due to high-interest ratesINTEREST RATE PARITY THEORYDifferences in nominal rates due to inflation ratesINTERNATIONAL FISHER EFFECTA commodity is priced same in every countryPURCHASING POWER PARITY THEORYThe forward rate is a fair predictor of the spot rate in the futureEXPECTATION THEORYQ9. DReceipts = 2,500 2.0 = $1,250Q10.Payment (Forward) = 60,000 1.654 = $36,276Payment (Spot) = 60,000 1.321 = $45,420Gain = $9,144Q11. AFuture Rate = $12.8 115% = $14.72Receipts = 3,600 14.72 = $244.57Q12. DThe Spot rate = $0.996/ $1.005/ -/+ 0.0045The dollar is at a premium so subtract it as if dollar strengthens then yen will weaken in the forwards market. The new Spot rate = $0.929/ $0.938/ 0.067Payment = $4,900 0.929 = 5,274Q13. BBorrow Foreign Currency = $2,000 1 + (4% 4/12) = $1,974Convert Foreign to Local = $1,974 1.4 = 1,410Deposit (Interest) = (1,410 2% 4/12) = 9.4Total Receipts = 1,410 + 9.4 = 1,419.4Q14. DDeposit Foreign Currency = 95,000 1 + (3% 9/12) = 92,910Convert Foreign to Local = 92,910 2.2 = $42,232Deposit (Interest) = ($42,232 7% 9/12) = $2,217Total Payments = $42,232 + $2,217 = $44,449Q15. $40,084Payments = 95,000 2.37 = $40,084Q16.BQ17. An immediate binding contract TRUE The forward rate is variable in nature FALSEThe timing of the contract is unknown FALSEQ18.The company should hold back its payments for few months, this technique is Lagging (Incorrect)The company should continue as normal This refers the company should take no action (Correct)I have some friends offshore who work in a bank, I may able to arrange a foreign account for the company said by a director. This statement indicates opening a foreign bank account. (Correct)The company should deal in the foreign currency only The company could deal in home currency sort of in foreign currency (Incorrect)Q19. DThis technique attempts to match the same foreign currency receipt & payments due at the same time. The netting of the intra debit entry & credit balances saving transaction cost & reducing risk.Q20.Currency futures are standard contracts, fixed limits specified (True)A high premium is paid initially, this is applicable in options (False)Futures are available in all currencies offered by the bank, Only in few currencies (False)Future contracts are binding, they have to be closed (True)Q21. CThe Futures can be bought or sold only four times a year which are March, June, September & December. Future contracts can be signed relating to a month after the date of receipt. They will buy two futures distributively of $15,000 and the remaining $6,000 can be hedged using other techniques. (E.g. forward contracts)Q22. Transaction cost is lowest ADVANTAGE Contracts are limited to some currencies DISADVANTAGEThe exact date does not have to be known ADVANTAGEQ23. BPicots Co will want to sell the USA $ when they receive the payment which is why they will use USA $ put (sell) o ption bought in the UK.Q24. In future the market becomes favorable and the company will face a loss because it is bound to the contract, this statement relates to future contracts They are negotiated, this statement relates to options (Correct) Cannot be traded in all currencies, it is a disadvantage hence this statement relates to options (Correct)Easily arranged & Flexible, this statement relates to swapsQ25. DIt has no markets it is a tailor-made an agreement between two parties.Q26. ACurrency Futures, An initial margin cost which is refundableForward Contracts, has a transaction costCurrency Options, A non-refundable premium costCurrency Swaps, No initial cost