If a U.S. firm desires to avoid the risk from exchange rate fluctuations and it
ID: 2766596 • Letter: I
Question
If a U.S. firm desires to avoid the risk from exchange rate fluctuations and it will need C$200,000 in 90 days to make payment on imports from Canada, it could (Points : 5)
A)obtain a 90-day forward purchase contract on Canadian dollars.
B) obtain a 90-day forward sale contract on Canadian dollars.
C) purchase Canadian dollars 90 days from now at the spot rate.
D) sell Canadian dollars 90 days from now at the spot rate.
Question 3.3. (TCO B) Assume that Swiss investors are benefiting from CIA due to a high U.S. interest rate.Which force results from the act of this CIA? (Points : 5)
A)Upward pressure on the Swiss franc's spot rate
B)Upward pressure on the U.S. interest rate
C) Downward pressure on the Swiss interest rate
D) Upward pressure on the Swiss franc's forward rate
Explanation / Answer
(1) (A)
The forward purchase contract on CAD will effectively "Lock in" the value of CAD at the specified exchange rate, so that a currency fluctuation can be avoided.
(3.3) (C)
As US interest rate rises, global investors invest more in US, which increases the demand for US dollars, and so US dollar appreciates and Swiss Franc depreciates. This puts a downward pressure on Swiss interest rate.