Question

NEW R 3. A Canadian company pays $300,000 consulting fee to a U.S. consulting company in San Diego. Which of the following account in the U.S. balance of payment statement will be affected by the cross-border transaction? A) Current account B) Capital account C) Foreign reserve account D) Unilateral payment account 6. Newstar, Inc., based in the U.S., exports products to a German firm and will receive E100,000 in six months. On February 1, the spot rate of the euro was $1.50, and the 6-month forward rate was $1.48. In order to hedge the foreign exchange risk, on February 1, Newstar negotiated with a bank to a forward contract on 100,000 based on the 6-month forward rate. Six months later, the spot rate of euro on August 1 turns out to be $1.60. Newstar will receive $ for the €100,000 euros. A) sell, 160,000 BY sell, 148,000 C) buy, 160,000 D) buy, 148,000 7. Which of the following statements is NOT correct? A) Forward contracts are privately negotiated contracts and are usually traded in the over- the-counter (OTC) market. Forward contract investors must maintain a margin account with a clearing house so that the gains or losses can be credited or debited each day to the margin account. C) Futures contracts are more standardized than forward contracts. Therefore, futures contracts tend to have higher liquidity than forward contracts. D) Futures contracts have the marked-to-market mechanism to settle the gains or losses every day. Thus, its default risk is much lower than the forward contract. 8. A Canadian dollar futures contract calls for delivery of 100,000 Canadian dollars. What happens to the buyer of a Canadian dollar futures contract at $0.98 per Canadian dollar if the futures price closes the next day at $1.00 per Canadian dollar? A) The contract is marked to market with a $2,000 loss. B) The contract is marked to market with a $2,000 gain. C) Futures contracts are voided if price increases before expiration. D) Nothing happens until the expiration of the contract. 2

Answer 1

5. Current Account since it is a business transaction.

6. a Sell, $160000 as the spot on August 1 turns out to be $1.60. Newstar will not execute the contract and will cancel it as it more beneficial for it to pay for cancellation charges instead of receiving less amount.

7. b point is not correct because Future contract investors need to maintain margin account with clearing house so that gains or losses can be credited or debited each day to the margin account.

8. b. The contract is marked to market with $ 2000 gain as the buyer has to pay at the rate the contract entered instead of the spot rate of $1.