Currency Risk Test Free Essays

The following scenario relates to Q1-5. R2F is expecting a receipt of $650,000 from a USA customer in four months’ time. The company has obtained a forward rate of  £1. We will write a custom essay sample on Currency Risk Test or any similar topic only for you Order Now 88/$. The current spot rate in the market is  £1.65/$. R2F can obtain a short-term loan of $ at 5% per annum. The relevant information is as follows: Short term $ deposit 3% per annum Short term $ borrowing 7% per annum Q1. Calculate the income using Forward market hedging? (MCQ)  £323,126  £329,281  £345,745  £419,355 (2 marks) Q2. Calculate the income using Money market hedging (to nearest  £)? (FIB) 3511551333500 £ (2 marks) Q3. Which of the following is not a way to reduce transaction risk? (MCQ) R2F will deal in pounds R2F will create a bank account in the USA R2F will net off the receipts with a supplier payment to made in China R2F should expect that there is no transaction risk taking no action (2 marks) Q4. If R2F’s competitor in a different country has a lower exchange rate, what kind of impact will it have on R2F? (MCQ) Currency impact Indirect impact Tax impact Direct impact (2 marks) Q5. R2F is trying to hedge using derivatives for the first time. Which of the following is the most cost-effective? (MCQ) Futures Options Forward contract Swaps (2 marks) The following scenario relates to Q6-10. Gaffs Co is located in China; the company has a loan in dollars at a fixed interest rate. The yield curve has indicated an upcoming recession which will increase the dollar interest rate. Gaffs Co has to pay an interest of $30,000 in six months’ time. The information is as follows: Spot Rate $/ ¥ $10.2 – $10.6 6 month Forward rate $/ ¥ $10.35 – $10.94 Borrow Deposit Dollar 8% per annum 6.3% per annum Yen 3.3% per annum 1.2% per annum Q6. Calculate the payment to be made using Forward market hedging (to nearest hundred)? (FIB) 3816356096000 ¥ (2 marks) Q7. Select the appropriate option. (HA) A forward contract is very difficult to use ; understand TRUE FALSE A forward contract can be settled using any amount TRUE FALSE (2 marks) Q8. Calculate the amount to be paid using Money market hedging? (MCQ)  ¥47  ¥2,744  ¥2,851  ¥2,898 (2 marks) Q9. Gaffs Co is considering a currency swap. Which of the following statement is correct? (MCQ) The contract cannot be tailored The exact date of receipt/payment is known The contract is binding Transaction cost is very expensive (2 marks) Q10. What will be the gain/loss if the payment is lead and paid immediately compared to forward contract? (MCQ)  ¥41 (Loss)  ¥158 (Loss)  ¥41 (Gain)  ¥158 (Gain) (2 marks) INTEREST RISK The following scenario relates to Q11-15. Tito Co is looking into the financing options to obtain a new subsidiary. Tito Co has estimated that they will need to borrow the USA $200,000 in two months’ time for six months. The company is concerned about the fluctuations in interest rates and is considering hedging this risk. Tito Co has been advised to consider using a forward rate agreement. The FRA’s are as follows: 2 months V 6 months 2.1% – 3.6% 2 months V 8 months 5% – 4.7% Q11. What will be the interest payment on the market interest rate of 4%? (MCQ) $700 $3,600 $4,000 $4,700 (2 marks) Q12. What will be the refundable percentage if the market interest rate is 6%? (MCQ) 1.3% 2.4% 3.6.% 4.7%(2 marks) Q13. The six-month forward rate is $1.515/â‚ ¬. The local interest rate is 4% ; the foreign interest rate is 6%. Calculate the six months’ forward rate? (MCQ) $1.45/â‚ ¬ $1.5/â‚ ¬ $1.54/â‚ ¬ $1.63/â‚ ¬ (2 marks) Q14. Select the appropriate option. (HA) Purchasing power parity theory tends to hold true in the long-term TRUE FALSE Inflation rates can be used to calculate expected future spot rates TRUE FALSE Current spot rates are based on interest rates TRUE FALSE (2 marks) Q15. Which of the following statements is/are true in relation to forward rate agreements? (MRQ) They are difficult to obtain for periods over one year FRA may not protect the borrower from adverse changes in the market FRA’s are over the counter contracts (2 marks) ANSWERS Q1. C Forward market hedge (receipt) = $650,000 à · 1.88 =  £345,745 Q2.  £396,522 Borrow = $650,000 à · [1 + (5% Ãâ€" 4/12)] = $639,344 Convert = $639,344 à · 1.65 =  £387,481 Deposit interest = [ £387,481 Ãâ€" (7% Ãâ€" 4/12)] =  £9,041 Total receipts =  £387,481 +  £9,041 =  £396,522 Q3. C All other options are correct to deal with transaction risk. The company can only net off if the currency/ amount/ timing all are same. Q4. B Indirect impact as competitor price will eventually decrease for the customers ; will shift to competitor business rather than staying at R2F. Q5. D Swaps have either nominal or no cost. Options have high premium cost. Futures have initial margin cost but are refundable. A forward contract is not a derivative but has a transaction cost. Q6.  ¥2,900 Forward market hedge (payment) = $30,000 à · 10.35 =  ¥2,899 Q7. A forward contract is very difficult to use ; understand FALSE A forward contract can be settled using any amount TRUE The forward contract is easy to use ; understand. The rate used is fixed and any amount can be settled using the locked rate. Q8. D Deposit = $30,000 à · [1 + (6.3% Ãâ€" 6/12)] = $29,084 Convert = $29,084 à · 10.2 =  ¥2,851 Borrow interest = [ ¥2,851 Ãâ€" (3.3% Ãâ€" 6/12)] =  ¥47 Total payments =  ¥2,851 +  ¥47 =  ¥2,898 Q9. C The contract can be tailored, The exact date of receipt/payment is not known, can be done anytime The contract is binding, (Correct) Transaction cost is either nominal or nothing Q10. A Spot (payment) = $30,000 à · 10.2 =  ¥2,941 Difference =  ¥2,941 –  ¥2,900 =  ¥41 (Loss) Q11. C Interest Payment = [200,000 Ãâ€" (4% Ãâ€" 6/12)] = $4,000 Q12. A The market interest rate is 6% ; The FRA fixed interest rate is 4.7%. The refundable interest rate = 6% – 4.7% = 1.3% Q13. B Calculated using Interest rate parity theory = Spot rate = $X Ãâ€" 1+(6% Ãâ€" 612)1+(4% Ãâ€"612) = $1.515 X= $1.5/â‚ ¬ Q14. Purchasing power parity theory tends to hold true in the long-term TRUE Inflation rates can be used to calculate expected future spot rates TRUE Current spot rates are based on interest rates FALSE Purchasing power parity theory is true in a long term as it is used to forecast future exchange rates and gives future spot rates. Interest rate parity theory uses interest rates to calculate forward rates. Q15. They are difficult to obtain for periods over one year, it is a limitation of FRA’s hence (Correct) FRA may not protect the borrower from adverse changes in the market, it protects the borrower from adverse market interest rates hence (Incorrect) FRA’s are over the counter contracts (Correct) How to cite Currency Risk Test, Papers