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Lorre Company needs 200,000 Canadian dollars (C$) in 90 days and is trying to determine whether or not to hedge this position. Lorre has developed the following probability distribution for the Canadian dollar:  Possible Value of   Canadian Dollar in 90 Days Probability $0.54 15%   0.57 25%   0.58 35%   0.59 25% The 90-day forward rate of the Canadian dollar is $.575, and the expected spot rate of the Canadian dollar in 90 days is $.55. If Lorre implements a forward hedge, what is the probability that hedging will be more costly to the firm than not hedging?

While a weak currency can reduce unemployment at home, it can also lead to higher inflation, as local companies are better able to raise prices.

If a bank has excess reserves of $4,000 and demand deposit liabilities of $100,000, and if the reserve requirement is 10 percent, then the bank has total reserves of

Assume that Japan and the United States frequently trade with each other. Under the freely floating exchange rate system, high inflation in the U.S. will place ____ pressure on Japanese yen, ____ the amount of Japanese yen available for sale, and result in ____ inflation in Japan.

Treck Co. expects to pay €200,000 in one month for its imports from Greece. It also expects to receive €450,000 for its exports to Italy in one month. Treck Co. estimates the standard deviation of monthly percentage changes of the euro to be 3 percent over the last 40 months. Assume that these percentage changes are normally distributed. Using the value-at-risk (VAR) method based on a 95% confidence level, what is the maximum one-month loss in dollars if the expected percentage change of the euro during next month is -2%? Assume that the current spot rate of the euro (before considering the maximum one-month loss) is $1.23.

In the market for reserves, if the federal funds rate is above the interest rate paid on excess reserves, an open market purchase ________ the supply of reserves and causes the federal funds interest rate to ________, everything else held constant.

Collateral requirements lessen the consequences of ________ because the collateral reduces the lender’s losses in the case of a loan default, and it reduces ________ because the borrower has more to lose from a default.

An example of indirect intervention by the Bank of Japan would be for the Bank of Japan to use interest rates to increase the value of the yen vs. the dollar.

The following regression analysis was conducted for the inflation rate information and exchange rate of the British pound:   eBP = ao + a1[(1+IU.S.)/(1+IU.K.) – 1] + µ   Regression results indicate that ao = 0 and a1 = 1. Therefore:

The interest rate on pounds in the U.K. is 8%. The interest rate in the U.S. is 5%. Interest rate parity exists. U.S. investors will earn a lower nominal return domestically than British investors earn domestically.