Question

Name Chapter 3 1) You observe a quotation of the Japanese yen (K) of $0.007. You are, however, interested in the number of yen per dollar. Thus, you calculate thequotation of /s a. direct; 142.86 b. indirect; 142.86 c. indirect; 150 d. direct; 150 e. indirect, 0 2) Which of the following is probably NOT appropriate for an MNC wishing to reduce its exposure to British pound payables? a. Purchase pounds forward b. Buy a pound futures contract c. Buy a pound put option. d. Buy a pound call option. 3) Assume that the spot rate of the Singapore dollar is $.664. The ADR of a Singapore firm is convertible into 3 shares of stock. The price of an ADR is $20. What is the share price of the firm in Singapore dollars? a. 10 c. 30.12 b. 13.28 d. 39.84 4) Assume a U.S. firm has to pay for Korean imports in 60 days. It expects that the Korean won wil depreciate, but it still wants to hedge its risk. What type of hedging is most appropriate in this situation? a. c. Buy dollars forward. Purchase call option. B. Sell dollars forward. D. Purchase put option. 5) Assume that $1 is equal to.85 euros and 98 yen. The value of the yen in euros is: a. .01 b. 118 c. 1.18 d. .0087 6) Assume a Japanese firm invoices exports to the United States in U.S. dollars. Assume that the forward rate and spot rate of the Japanese yen are equal. If the Japanese firm expects the U.S. dollar to against the yen, it would likely wish to hedge. It could hedge bydollars forward. a. depreciate; buying b. depreciate; selling c. appreciate; selling d. appreciate; buying 7) If a U.S. firm will need C$200,000 in 90 days to pay for imports from Canada and it wishes to avoid the risk from exchange rate fluctuations, it could a. purchase a 90-day forward contract on Canadian dollars. b. sell a 90-day forward contract on Canadian dollars. c. purchase Canadian dollars 90 days from now at the spot rate. d. sell Canadian dollars 90 days from now at the spot rate.

Answer 1

1) In direct quote one unit of foreign currency is expressed in terms of domestic currency whereas under indirect quote the foreign currency is variable and the domestic currency is fixed at one unit.

Therefore in the given question correct answer is option b i.e. indirect ; 142.86

Note = 1/0.007 = 142.8571 i.e 142.86

2)

The correct answer is option C i.e. Buy a pound put option

Since the MNC would require Pound to pay at a future date therefore it can reduce its exposure of fluctuation in Price of Pound by Buying the same in either Future, Forward or option market.

3) Price of ADR in Singapore dollar = $20 / 0.664 = Singapore $ 30.1205

Therefore Share price in Singapore dollars = ADR / 3 = 30.1205/3 = Singapore $ 10.04 i.e 10

4)

The correct answer is option C i.e. Purchase Call option

Since the call option will give the right to buy at a specific strike rate at a marginal premium which reduces the risk if the Korean won depreciates.

Note: As per guidelines i need to answer only 1st question but i have answered 1st four questions