Foreigh Currency Risk Test

external CURRENCY RISKQ1. trap is a UK base car exporter who exports luxury cars and has a competitor in Germany he has recently seen a change in contradictory capital that pound () of UK has strengthened a crystalizest euro () of Germany. What is the type of risk does Jack face in his bloodline? (MCQ) Credit get on the line Translation endangerment Economic Risk Transaction Risk(2 marks)Q2. Yarn Co is multinational business & wants its contrary subsidiary financial statements. They are making shift prejudicees when the accounting results of its foreign subsidiary are translated into the home cash. Which type of currency risk does Yarn Co face? (MCQ) Netting off Risk Translation Risk Economic Risk Hedging Risk(2 marks)Q3. Saito Co, a regular army ground slant exporter has competition with Sakkara Co based in Bangladesh. He believes he faces an economic risk in the business. What type of impact does it nominate on Saito Co? (MCQ) Direct Impact Indirect Impact g ever yplacenmental Impact Economic Impact(2 marks)Q4. The flowing spot set out of UK () to USA ($) is 3$1.5. The stakes group judge per annum are UK 5% & USA 9%. What entrust be the cardinal-month forward consider (to the nearest ii decimal places)? (FIB) $1(2 marks)Q5. The latest spot set of UK () is 3. The inflation rate per annum of UK is 3% & the expected approaching six-month spot rate is 3.06. Calculate the foreign annual inflation rate? (FIB)%(2 marks)Q6. Which of the next statements mentions to International Fisher Effect? (MCQ) The substitute range of countries depending on inflation rates The exchange rates of countries depending on interest rates Prices are afore tell(prenominal) to various customers in an economy Nominal interest rate differentials amongst countries provide an unbiased predictor of in store(predicate) changes in spot exchange rates.(2 marks)Q7. Which of the following differences bequeath result in an scene Theory? (MRQ) The difference in Inflation Rates contrast in the midst of turn & out front Rates The difference of Interest Rates diversion between Spot & Future Rates(2 marks)Q8. Select the appropriate theory with the following statements. (P&D)Depreciation of ship rates pull up stakes be due to high-interest rates Differences in nominal rates due inflation rates A commodity is priced same in every country The forward rate is a fair predictor of the spot rate in the future arithmetic mean system PURCHASING POWER PARITYTHEORY INTERNATIONAL FISHER EFFECT live-to doe with RATE PARITY THEORY(2 marks)Q9. Patio Co. operates in the USA. They forget be receiving a payment of 2,500 from customers in quaternion months time. Calculate Patio Co.s tax income in four months time? Use the following rates. (MCQ)Spot Rate 1.4/$ 1.6/$4 calendar month send on Rate 1.8/$ 2.0/$ $1,786 $1,563 $1,389 $1,250(2 marks)Q10. Fray Co is a USA based play along imports Robots from China. The usual credit period is three mont hs. Fray Co has to pay 60,000. Calculate the loss/gain of the payment on forwarding contract? (MCQ)Spot Rate 1.321/$ 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 gild has made $3,600 sale to its USA customer on credit. The current /$ exchange rate is 6.4/$12.8. It is expected that UK will strengthen by 15%, by the time USA customer pays. Calculate the notices in ? (MCQ) 244.57 281.25 489.13 562.5(2 marks)Q12. The dollar is quoted at a $0.067 gift for the forward rate. The current exchange rate is $/ 1.0005 +/- 0.0045. What will a $4,900 payment convert at forwarding rate? (MCQ) 4,876 4,920 5,224 5,274(2 marks)Q13. A UK based company Bib Co will receive a foreign payment of $2,000 in four months time. The spot rate is $1.1/ $1.4/. Calculate the income in four months time victimisation money market parry? (MCQ) Borrow DepositDollar ($) 4% 5%Pounds () 3% 2% 1,414.4 1,419.4 1,800 1,807(2 mar ks)This information is used for Q14, Q15 Q14.A USA based company has to pull back a payment of 95,000 in nine months time. The spot rate is 2.2/$ 2.5/$. pursuit details are Borrow DepositDollar ($) 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/$? (FIB)$ (2 marks)Q16. Calculate the gain/loss for the company for not 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 adjacent binding contract TRUE FALSEThe forward rate is variable in nature TRUE FALSEThe timing of the contract is mysterious TRUE FALSE(2 marks)Q18. A company wants to annul its transaction risks when conducting business with foreign receivables/payables. Following statements are said by the directors during this years AGM. Select the appropriate stat ements to reduce the risk. (MRQ) The company should realize back its payments for few months, this technique is Leading The company should continue as normal I bugger off some(a) friends shoreward who work in a vernacular, I may able to initialise a foreign account for the company said by a director The company should deal in the foreign currency single (2 marks)Q19. Juab Co is a manufacturing company has a foreign supplier who supplies tippy materials. Recently the supplier has now become a customer as well, who purchases Juab Co.s finished products and sells in his respective country. Which technique of reducing risk is applicable for Juab Co? (MCQ) Money market contract Leading & Lagging Forward market hedging Matching & Netting(2 marks)Q20. Which of the following statements are true in relation to futures? (MRQ) currency futures are standard contracts A high premium is paid initi each(prenominal)y Futures are available in all currencies offered by the bank Future contr acts are binding (2 marks)Q21. A company wants to besiege itself from any currency 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) get three futures on March Sell two futures of March bargain for two futures of June Buy three futures of September(2 marks)Q22. Select the appropriate option in relation to futures. (HA) Transaction toll is lowest ADVANTAGE DISADVANTAGEContracts are special 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 draw poker 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 sl ump? (MCQ) buy a USA $ call option in the UK Buying a USA $ put option in the UK Buying a UK call option in the USA Buying 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 contract They are negotiated Cannot be traded in all currencies Easily pose & Flexible (2 marks)Q25. Which of the following is incorrect for swaps? (MCQ) It is negotiated between two parties having their own spot rate It has a nominal cost It is an over the counter deal It has multiple markets (2 marks)Q26. Which of the following has a refundable cost? (MCQ) money Futures Forward Contracts Currency Options Currency Swaps(2 marks)FOREIGN CURRENCY RISK (ANSWERS)Q1. CEconomic risk is the variableness 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 w hen the accounting results of its foreign subsidiary are translated into the home currency. This is an reading 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 expense because your fish have become more expensive in the eyes of customers some(prenominal) abroad and at home.Q4. 3.02Interest rate parity theory = 3 (1+(9% 2/12))/(1+(5% 2/12)) = 3.02Q5. 7%Purchasing power parity theory = 3 (1+(x% 6/12))/(1+(3% 6/12)) = 3.06X% = 7%Q6. D The 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 law of one price. (Purchasing Power Parity Theory) Nominal interest rate differentials between countries provide an unbiased predictor of future changes in spot exchange rates. (Int ernational Fisher Effect)Q7. When these two will become equal, forecast Theory arises. Difference between Spot & Forward Rates Difference 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 part 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 rat her 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 & credit balances relieve transaction cost & reducing risk.Q20. Currency futures are standard contracts, meliorate 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 locoweed be bought or sold only four times a year which are March, June, September & December. Future contracts can be subscribe relating to a month after the date of receipt. They will buy two futures each of $15,000 and the remaining $6,000 can be hedged using new(prenominal) techniques. (E.g. forward contracts)Q22. Transaction cost is lowestADVANTAGEContracts are limited to some currenciesDISADVANTAGEThe exact date does not have to b e knownADVANTAGEQ23. BPicots Co will want to sell the USA $ when they receive the payment which is why they will use USA $ put (sell) option 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. A Currency Futures, An initial margin cost which is refundable Forward Contracts, has a transaction cost Currency Options, A non-refundable premium cost Currency Swaps, No initial cost