Question

B) FALSE dents) are 22) Currency inflows (payments by residents of any other country to U.S. resi recorded as credits in the U.S. BOP A) TRUE B) FALSE. 23) If China acquires $100 billion of U.S. government bonds, this is a credit in the U.S. current account. A) TRUE B) FALSE 24) Today, a U.S. importer places an order for machine tools that will arrive in Houston in 60 days, when he must pay 4,000,000 to the German exporter. Assume that the price of at- euromol yw oulds euro calsis Sood he spot rate today is Ss1-40. How many A) 16 B) 24 C) 32 D) 48 25) How much would the calls have cost? A) $40,000 B) 32,000 C) 24,000 D) 48,000 26) How much did he save by hedging with calls versus not hedging, if the spot rate is $1.65 when payment is due? A) $110,000 B) $124,000 C) $720,000 D) $440,000 E) $960,000. save by hedging with calls versus hedging with a forward contract, if 27) How much did he the forward rate is $1.40, and if the spot rate is $1.00 when payment is due? A) S1,560,000 B) $1,460,000 C) S1,660,000 D) $1,260,000 AI 28) A US. importer has agreed to receive payment in yen 3-months hence. One way to hedge is to buy yen puts. A) TRUE B) FALSE 4

Answer 1

22) TRUE - as currency inflow bring the foreign currency into the current and increase the balance of payment with respect to foreign currencies

23) TRUE - as China paid in USD to buy the US government bonds which is addition to current account

25) A) $40,000

Size of goods to be purchased = EUR 4,000,000

Price of call = $0.01 per Euro

Cost of call = Size of good * price per call option = 4,000,000 * 0.01= $40,000

26) E) $9,60,000

Gain if spot rate at the time payment due = (Future spot rate - strike spot rate) * total goods amount to be purchased - cost of call option

= (1.65-1.4) * 4,000,000 - 40,000

= $9,60,000

27) A) 1,560,000

Hedging with forward rate of $1.40 and spot rate of $1.00

Net payoff from forward contract = (forward rate - spot rate) * goods value to be purchased

= (1.4 -1) * 4,000,000

= $1,600,000

Since spot rate when payment due ($1.00) is less than current sport rate ($1.40), option contract will not be exercised.Payoff would be call option cost = -$40,000

Total payoff = 1,600,000 -40,000

= $1,560,000

28) TRUE - As payment will be received in Yen, importer is more concern about decline in price of Yen. Put option will secure the importer against decrease in price of yen vs. $