Blog

Assume that Patton Co. will receive 100,000 New Zealand dollars (NZ$) in 180 days. Today’s spot rate of the NZ$ is $.50, and the 180-day forward rate is $.51. A call option on NZ$ exists, with an exercise price of $.52, a premium of $.02, and a 180-day expiration date. A put option on NZ$ exists with an exercise price of $.51, a premium of $.02, and a 180-day expiration date. Patton Co. has developed the following probability distribution for the spot rate in 180 days:  Possible Spot Rate   in 180 Days Probability $.50 10% $.54 60% $.55 30% The probability that the forward hedge will result in more U.S. dollars received than the options hedge is ____ (deduct the amount paid for the premium when estimating the U.S. dollars received on the options hedge).

Macomb Corporation is a U.S. firm that is invoiced on some of its imports in Japanese yen. If it expects the yen to strengthen, it could ____ to hedge the exchange rate risk on those imports.

Given a home country and a foreign country, the international Fisher effect (IFE) suggests that:

The form of proof that deals with rational appeals based on facts, statistics, examples,  expert testimony  and reasoning is called

A ____ is not normally used for hedging long-term transaction exposure.

Forward contracts are usually liquidated by offsetting transactions, while futures contracts are usually liquidated by delivery of the currency.

A U.S. corporation has purchased currency call options to hedge a 70,000 pound payable. The premium is $.02 and the exercise price of the option is $.65. If the spot rate at the time of maturity is $.50, what is the total amount paid by the corporation if it acts rationally?

Realignment in the exchange rates of banks will eliminate locational arbitrage. More specifically, market forces will increase the ask rate of the bank from which the currency was bought to conduct locational arbitrage and will decrease the bid rate of the bank to which the currency was sold to conduct locational arbitrage.

Assume Countries A, B, and C produce goods that are substitutes of each other and that these countries engage in trade with each other. Assume that Country A’s currency floats against Country B’s currency, and that Country C’s currency is pegged to B’s. If A’s currency depreciates against B, then A’s exports to C should ____, and A’s imports from C should ____.

The ____ the existing strike price relative to the spot price, the ____ valuable the put options will be.