Part I-Problem solving (50 points; 5 points each)

1.   A Korean firm borrowed $1 million at 8% (per annum, annual compounding) for 3 years on January 3, 1995. The exchange rate on the borrowing date was 791.8 Korean won per dollar. On the Maturity date (January 3, 1998), the exchange rate was 1695 Korean won per dollar.  What was the effective borrowing rate (measured in Korean won) for this Korean firm?

Your answer: ______________%

(Do NOT include the “%” symbol. Round your answer to TWO decimal places.)

2.   The table below presents the effective exchange rate of the U.S. dollar against major currencies (Source: Federal Reserve).

From March 1985 to March 2013, how much did the value of the U.S. dollar change in percentages?

Your answer: _______________%

(Do NOT include the “%” symbol. DO include the “-”sign if your answer is a negative number. Round your answer to TWO decimal places.)

3.   On August 22, 2007, the spot exchange rate between U.S. $ and Japanese Yen was ¥77.9800/$, the one-year US$ LIBOR interest rate was 5.104% and the one-year Yen LIBOR interest rate   was 1.196%. If the interest rate parity (the exact formula) held, what would be the forward        exchange rate between U.S. $ and Japanese ¥?

Your answer: ¥__________________/$ (yens per dollar)

(Do NOT include “$”, “¥”, or words in your answer. Round your answer to FOUR decimal places.)

4.   Refer to the information below.

Hint: Ignore the base years for the CPI indexes in answering the question.                               Using 2004 as the year for comparison, what was the PPP-implied exchange rate at the end of 2012 (Chinese yuan per U.S. dollar)?

Your answer: Yuan____________/$ (yuan per dollar).

(Do NOT include “$”, “¥”, or words in your answer. Round your answer to FOUR decimal places.)

5.   The table below shows the call and put prices at various strike prices for the Australian dollar   on February 2, 2015 for maturity in March 2015 (The underlying asset is the Mar15 Australian  futures contract, so it has the same maturity date as the Mar15 Australian dollar futures). The    option contract size is AUD$100,000 per contract. The prices in the table are in dollars per       AUD$ (for example, 0.0298 means $0.0298/AUD$). The strike price of “7550” should read as $0.7550/AUD$.

If you have to fulfill your debt obligation of AUD$1,000,000 in March 2015 (on the same    date as the maturity date of the options), and you decide to use an option with a strike price of “7600” to hedge your position. What is the maximum potential cost per AUD$ when you purchase AUD$ at maturity?

Your answer: $________________/AUD$

(Keep four decimals; Do not include currency symbols in your answer.)

6.   Assume that Total SA, a world leading oil and gas company headquartered in La defense,    France, borrows SFr 100,000,000 for ten years commencing on January 1, 2015 for its new  exploration project. According to the terms of the loan, Total SA pays interest at the end of each year and pays back the principle at the end of ten years. On the borrowing date, the     relevant financial information is:

Spot = SFr1.20/€

i€            = 5.0%

iSFr        = 3.0%

Suppose that on December 31, 2015, the spot rate is SFr1.00/€ .

When Total’s Swiss franc debt is translated to € at the end of 2015, how much is the             translation gain or loss (do not consider the interest expense; if it is a loss, put a negative sign “-” in your answer)?

Your answer: €___________________.

(Keep two decimals; Do not include currency symbols in your answer; Do include the negative sign, “-” in your answer if your answer is a negative number.)

7.   A Japanese firm produces a particular product in Japan and exports to the United States. Its production cost, domestic price, exchange rate, and U.S. sales volume and other related       information (baseline case) are presented as follows:

Assume that the point price elasticity of demand for this Japanese firm’s product in the U.S. market is 2.

Suppose the Japanese yen depreciates from ¥100/$ to ¥125/$. If the Japanese firm chooses to follow a complete pass-through strategy, how does this affect its profitability in Japanese  yen (how much does the firm’s net profit change in percentages)?

Your answer: ___________________%

(Keep two decimals; Do not include currency symbols in your answer; Do include the negative sign, “-” in your answer if your answer is a negative number.)

8.   A firm buys “three against six” FRA at 7.5% (annualized) with the notional principal of $2 million. At maturity the interest rate in the market is 9%. How much is the firm cash         settlement for the FRA? (Assume dtm is 91 days.)

Your answer: $_____________________.

(Keep two decimals; DO include the “-” sign in your answer if the firm needs to make a payment.)

9.   A U.S. investor is considering a portfolio consisting of 60% invested in the U.S. equity index fund and 40% invested in the British equity index fund. The expected returns for the funds  are 10% for the U.S. and 8% for the British, standard deviations of 20% for the U.S. and      18% for the British, and a correlation coefficient of 0.15 between the U.S. and British equity funds. What is the standard deviation of the proposed portfolio?

Your answer: _______________%

(Keep two decimals; Do include the “-” if your answer is a negative number.)

10. At the end of 2014, a Eurozone firm considers an investment project in Switzerland. The firm’s cost of capital is 10% and the firm uses this as its discount rate for the proposed    investment. The initial investment and free cash flows for subsequent years (a horizon of five years) are presented in the table below.

On January 15, 2015, the Swiss National Bank removed the exchange rate cap and the          exchange rate changed from Sfr1.20/€ to Sfr1.00/€ . The exchange rate is expected to stay at the new level for the investment horizon. The exchange rate change does not affect cash      flows in Swiss franc but does affect the conversion from Swiss franc cash flows to euro cash flows. What is the project’s NPV after the exchange rate change?

Your answer: €_______________.

(Keep two decimals; Do include the “-” if your answer is a negative number.)

Part II-Multiple choice or short answer questions (50 points; 2.5 points each)

1.   Which of the following is NOT included in the current account?

a.   Exports and imports of services

b.   Exports and imports of merchandise

c.    Dividend payments by foreign subsidiaries to their foreign parent companies

d.   Purchases of government bonds

2.   The U.S. current account deficit in 2012 means that total U.S. production (measured by GDP) was ________ its  total  expenditure  (the  sum  of consumption,  domestic investment,  and government expenditure).

a.   more than

b.   less than

c.    equal to

3.   The effective exchange rate is________.

a.   also called the real or the actual exchange rate as compared to the purchasing power parity implied exchange rate

b.   an index of the weighted-average foreign exchange value of a currency against a basket of other currencies

c.   the exchange rate that is used in the actual international trade transactions between domestic residents and foreign residents

4.   The Economist publishes annually the “hamburger standard” by which they compare the prices of the McDonalds Corporation Big Mac hamburger around the world. The index estimates the exchange rates for currencies based on the assumption that the burgers in question are the same across the world and therefore, the price should be the same. If a Big Mac costs $2.54 in the     United States and 294 yen in Japan, what is the estimated exchange rate of yen per dollar as       hypothesized by the Hamburger index?

a.   $0.0086/¥

b.   124¥/$

c.   $0.0081/¥

d.   115.75¥/$

5.   Under a fixed exchange rate regime, the central bank of a country has to intervene in the      foreign exchange market to keep the value of its currency at a certain fixed level. If a central bank buys foreign exchange in the foreign exchange market, which of the following can help sterilize the money supply?

a.   Buy government bonds through open market operation.

b.   Reduce the required reserve ratio for deposits at the central bank.

c.    Sell government bonds through open market operation.

6.   The real exchange rate provides a measure of ______________.

a.   price competitiveness of domestic goods versus foreign goods.

b.   price of one currency in terms of another currency.

c.    percentage changes of the exchange rate.

d.   how the nominal exchange rate is affected by inflation rates.

7.   Suppose you are an American company and have an account receivable in one million euro due in six months. Which of the following represents a correct strategy for hedging?

a.   Borrow dollars, convert to euro, and invest in euro.

b.   Sell euro forward.

c.    Sell euro put options.

d.   Buy euro futures.

8.   Which of the following is NOT true about “quantitative easing” as a monetary policy tool?

a.   Quantitative easing is a conventional policy tool in which the central bank provides additional liquidity for the economy and the financial system.

b.   Quantitative easing expands the central bank’s balance sheet as the central bank spends money on purchasing securities.

c.   In the two rounds of quantitative easing from 2008 to 2011, the Federal Reserve purchased both Treasury securities and securities guaranteed by government-sponsored enterprises.

d.   Quantitative easing has been used in rare cases in which policy interest rate is close to 0%.

9.   In a The Wall Street Journal article ("A Matter of Exchange Rates," June 21, 1994), John F. Welch, chairman and CEO of General Electric, said that "If the Japanese are preparing to  compete at ______ yen to the dollar, the U.S. must be ready to compete at ________ yen. Until we are, we delude ourselves."

a.    90;    90

b.    90;  130

c.   130;    90

d.   130;  130

10. According to the international Fisher Effect, if an investor purchases a five-year U.S. bond that has an annual interest rate of 5% rather than a comparable British bond that has an annual       interest rate of 6%, then the investor must be expecting the _________ to ___________ at a  rate of at least 1% per year over the next 5 years.

a.   British pound; appreciate

b.   British pound; revalue

c.    U.S. dollar; appreciate

d.   U.S. dollar; depreciate

11. A company producing an undifferentiated product and competing with internationally         diversified competitors will face a relatively _____ price elasticity of demand for its products and possess a relatively _____ degree of pricing flexibility.

a.   high; low

b.   low; low

c.    low; high

d.   high; high

12. Which of the following statements regarding currency futures contracts and forward contracts is NOT true?

a.   The futures contract is marked to market daily whereas the forward contract is only due to be settled at maturity.

b.   The counterparty to the futures participant is unknown with the clearinghouse stepping into each transaction whereas the forward contract participants are in direct contact setting the   forward specifications.

c.   A single sales commission covers both the purchase and sale of a futures contract whereas there is no specific sales commission with a forward contract because banks earn a profit  through the bid-ask spread.

d.   A forward contract is for a fixed maturity whereas the futures contract is for any maturity you negotiate for but mostly for up to one year.

13. Transaction exposure and operating exposure exist because of unexpected changes in future cash flows. The difference between the two is that ________ exposure deals with cash flows already contracted for, while ________ exposure deals with future cash flows that might      change because of changes in exchange rates.

a.   transaction; operating

b.   operating; transaction

c.    operating; accounting

d.   accounting; operating

14. The U.S. dollar appreciated substantially from mid-2014 to the first quarter of 2015 against most currencies in the world. Which of the following statement describes an unlikely event associated with the surge of the U.S. dollar?

a.   Everything else equal, the real exchange rate of the dollar increases.

b.   Everything else equal, U.S. MNE earnings abroad translate into fewer dollars.

c.    Everything else equal, the cost of dollar-nominated debt by other countries increases.

d.   Everything else equal, it becomes more costly for Americans to travel abroad.

15. A firm with fixed-rate debt that expects interest rates to fall may engage in a swap agreement to

a.   pay fixed-rate interest and receive floating rate interest.

b.   pay floating rate and receive fixed rate.

c.    pay fixed rate and receive fixed rate.

d.   pay floating rate and receive floating rate.