Use the following information for questions 11-12 Current Exchange Rates: $1.6 =
ID: 2652042 • Letter: U
Question
Use the following information for questions 11-12
Current Exchange Rates: $1.6 = 1 British Pound and 2.5 Swiss Francs = $1
Current one-year Inflation Rates: 0% in Switzerland, 4% in Britain, and 2% in the US
11. What should the cross rate be between Francs and Pounds?
a).25 SF per Pound
b).64 Pounds per SF
c)1.56 SF per Pound
d) 4 SF per Pound
12. If interest parity holds true, what is the expected exchange rate one year from now?
a).613 Dollars per Pound
b).637 Pounds per Dollar
c)1.57 Pounds per Dollar
d)1.63 Dollars per Pound
13. In the currency markets, $1 = 0.75 British pound and 1 Euro = $1.25. Wolverine Cola produces cherry cola in England at a cost of 0.9 British pound per unit. The product is sold in France for 1.5 euros. In terms of U.S. dollars, how much profit is Wolverine realizing on each unit sold?
a. $0.37 b. $0.675 c. $0.875 d. $1.04
14. Which of the following statements is FALSE?
a. Any bond sold outside the country of the borrower is called an international bond.
b. Foreign bonds and Eurobonds are two important types of international bonds.
c. Foreign bonds are bonds sold by a domestic borrower but denominated in a different currency than the country in which the issue is sold.
d. The term Eurobond applies to any bonds that are denominated in a currency that differs from the country in which the issue is sold.
15. The US has a _________________ because we buy more foreign goods than foreigners buy of our goods.
Capital Account Surplus
Current Account Deficit
Current Account Surplus
Capital Account Deficit
16. The current spot price of the S&P is $1200. If the risk free rate is 5% and if owning the S&P would result in $20 of dividend income, then what should the futures price be?
a) $1200 b) $1225 c) $1240 d) $1280
Explanation / Answer
Current Exchange Rates: $1.6 = 1 British Pound and 2.5 Swiss Francs = $1
Current one-year Inflation Rates: 0% in Switzerland, 4% in Britain, and 2% in the US
11. What should the cross rate be between Francs and Pounds?
Cross Rate between Francs and pounds
1.6 $= 1 pound
2.5*1.6= 1Pound = 4
d) 4 SF per Pound
12. If interest parity holds true, what is the expected exchange rate one year from now?
1.6 pound*102%= 1.632 & 1$*104%= 1.04 1$= 1.6/1.04 pound = 1.57 pound per dollar
c)1.57 Pounds per Dollar
13. The correct answer is b) .675
sales=1.5*1.25 = 1.875
Cost= 1/.75*.9 = 1.20
Profit= 1.875-1.20 = .675
15. Capital Account Surplus
16. d) 1280
1200*105%+20= $ 1280