Chapter 18 Forward Exchange and International Financial Investment

11. An investment is __________ if it is fully hedged against exchange rate risk.

a. Covered

b. Uncovered

c. Speculative

d. Contracted

12. Which financial instrument provides a buyer the right (but not the obligation) to purchase or sell a fixed amount of currency at a prearranged price, within a few days to a couple of years?

a. Letter of credit.

b. Foreign currency option.

c. Currency swap.

d. Forward contract.

13. Concerning the covering of exchange market risks—assuming that a depreciationof the domestic currency is feared, one can say that there is an incentive for:

a. Exporters to rush to cover their future needs.

b. Importers to rush to cover their future needs.

c. Both exporters and importers to rush to cover their future needs.

d. Neither exporters nor importers to rush to cover their future needs.

14. If Canadian speculators believed the euro was going to appreciate against the U.S. dollar, they would:

a. Purchase Canadian dollars.

b. Purchase U.S. dollars.

c. Purchase euros.

d. Sell euros.

15. If the spot price of the euro is $1.10 per euro and the 30-day forward rate is $1.00 per euro, and you believe that the spot rate in 30 days will be $1.05 per euro, you can maximize speculative gains by:

a. Buying euros in the spot market and selling the euros in 30 days at the future spot rate.

b. Signing a forward foreign exchange contract to sell the euros in 30 days.

c. Signing a forward foreign exchange contract to sell the dollars in 30 days.

d. Buying dollars in the spot market and selling the dollars in 30 days at the future spot rate.

16. If an investor starts with dollars and wants to end up with dollars in the future, which of the following is NOT an investment choice that can be made?

a. Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and sign a forward exchange contract to buy the foreign currency.

b. Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and sign a forward exchange contract to buy dollars.

c. Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and then buy dollars at the future spot rate.

d. Buy a dollar-denominated financial asset.

17. For an investor who starts with dollars and wants to end up with dollars in the future, which of the following choices is an example of covered international investment?

a. Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and sign a forward exchange contract to buy the foreign currency.

b. Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and sign a forward exchange contract to buy dollars.

c. Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and then buy dollars at the future spot rate.

d. Buy a dollar-denominated financial asset.

18. For an investor who starts with dollars and wants to end up with dollars in the future, which of the following choices is an example of uncovered international investment?

a. Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and sign a forward exchange contract to buy the foreign currency.

b. Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and sign a forward exchange contract to buy dollars.

c. Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and then buy dollars at the future spot rate.

d. Buy a dollar-denominated financial asset.

19. For an investor who starts with dollars and wants to end up with dollars in the future, which of the following choices is an example of hedging?

a. Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and sign a forward exchange contract to buy the foreign currency.

b. Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and sign a forward exchange contract to buy dollars.

c. Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and then buy dollars at the future spot rate.

d. Buy a dollar-denominated financial asset.

20. For an investor who starts with dollars and wants to end up with dollars in the future, which of the following choices is an example of speculating?

a. Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and sign a forward exchange contract to buy the foreign currency.

b. Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and sign a forward exchange contract to buy dollars.

c. Sell dollars at the spot rate, invest the proceeds in foreign currency-denominated financial instruments, and then buy dollars at the future spot rate.

d. Buy a dollar-denominated financial asset.