QUESTION 17 The spot and 30 day forward rates for the Dutch guilder are $.3075 a
ID: 2757066 • Letter: Q
Question
QUESTION 17
The spot and 30 day forward rates for the Dutch guilder are $.3075 and $.3120, respectively. The guilder is said to be selling at a forward
premium of 19.51%
premium of 17.56%
premium of 9.76%
discount of 17.56%
5 points
QUESTION 18
A ________ involves simultaneously borrowing and lending activities in two different currencies to lock in the currency's value of a future foreign currency cash flow.
forward contract
currency collar
money-market hedge
currency option
5 points
QUESTION 19
If you fear the dollar will rise against the French franc, with a resulting adverse change in the dollar value of the equity of your French subsidiary, you can hedge by
selling francs forward in the amount of net assets
buying francs forward in the amount of net assets
reducing the liabilities of the subsidiary
selling francs forward in the amount of total assets
5 points
QUESTION 20
Under FASB 52, most financial statements must be translated using the
monetary/nonmonetary method
current/noncurrent method
current rate method
temporal method
premium of 19.51%
premium of 17.56%
premium of 9.76%
discount of 17.56%
Explanation / Answer
Question 17
Spot
$0.3075
30-Day Forward
$0.3120
Annualized Forward Premium
= ((Forward Price - Spot Price)/ Spot Price)*(12/# of Months of Forward contract expiry)*100%
=((0.3120-0.3075)/0.3075)*(12/1)*100% = 17.56%
Since the 30-Day forward rate of $/Guilder rate is higher than Spot rate, Guilder is considered strong and so trading at a premium of 17.56%
Question 18
Money Market Hedge
Question 19
Buying francs forward in the amount of net assets
Question 20
Current Rate Method and Temporal Method
Spot
$0.3075
30-Day Forward
$0.3120
Annualized Forward Premium
= ((Forward Price - Spot Price)/ Spot Price)*(12/# of Months of Forward contract expiry)*100%
=((0.3120-0.3075)/0.3075)*(12/1)*100% = 17.56%