Question 9: The spot rate for the Japanese Yen is currently Y120 to $1. ABC Bank

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

Question 12: ABC should lend (note the currency it lends at can be different from the currency it borrowed as it can convert at the spot market):
A) C$80 M
B) $30 M and C$55 M
C) C$83.33 M
D) $96 M

Question 13: The maximum profit ABC can make in the 6 month period (assume it does not have any money other than that provided by the borrowing capacity set in the question):
A) $4.167 M
B) $7.292 M
C) $1.663 M
D) $3.292 M

Question 14: Suppose Brazilian inflation increased whereas US inflation decreased. Ceteris paribus this would lead to an increased demand for dollars.
A) True B) False

Question 15: Suppose Brazilian inflation increased whereas US inflation decreased. Ceteris paribus this would lead to an appreciation of the Brazilian Real against the dollar.
A) True B) False

Question 16: If you expect the Yen to appreciate then you should buy Yen call options.
A) True B) False

Explanation / Answer

9. B
10. A

11.A

12.C

13.A
14.True

15.False

16.False

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

---