Question 9: The spot rate for the Japanese Yen is currently Y120 to $1. ABC Bank
ID: 2664911 • Letter: Q
Question
Question 9: The spot rate for the Japanese Yen is currently Y120 to $1. ABC Bank holds Japanese government bonds. It expects that the Japanese Yen will depreciate against the US by an amount greater than given by IRP. It should:A) do nothing.
B) enter into a forward contract where it will sell Yens for dollars.
C) enter into a forward contract where it will sell dollars for Yens.
D) enter into a swap where it will swap its Japanese government bonds for Japanese corporate bonds.
Question 10: Suppose you have the following exchange rates (C$ is short for Canadian dollars):
$1 equals C$ 0.95
C$ 1 equals Euro 0.7
$1 equals Euro 0.65
Then if you have dollars for triangular arbitrage you will:
A) convert dollars to C$, then C$ to Euros, and Euros back to dollars.
B) convert dollars to C$, then C$ to Euros, then Euros back to C$, and C$ back to dollars.
C) convert dollars to C$, then C$ back to dollars.
D) convert dollars to Euros, then Euros to C$, and C$ back to dollars.
Information for questions 11 to 13: ABC Bank expects the C$ will appreciate against the dollar from $1.20 to $1.25 over the next 6 months. The annualized rates (that is the 6-month rate multiplied by 2) for ABC are:
Lending Borrowing
Dollars 4% 5%
C$ 3% 4%
ABC has the ability to borrow up to $100 M, or C$ 80 M. It can lend as much as it wishes.
Question 11: ABC should borrow:
A) $100 M
B) C$80 M
C) $50 M and C$41.66 M
D) $30M and C$55 M
Explanation / Answer
9. B
10. A
11.A
12.C
13.A
14.True
15.False
16.False