I have sample problems with the answers. Please show me in detail the process in obtaining the answer so that I will know how to do it properly on my own and compare it with the way that I am doing the problems. Thank you.
4. A firm wants to use an option to hedge 12.5 million in receivables from New Zealand firms. The premium is $.03. The exercise price is $.55. If the option is exercised, what is the total amount of dollars received (after accounting for the premium paid)?
6. Which of the following is not true regarding options? Explain why answer is correct as opposed to other answers
Answer: Options are traded on exchanges, never over-the-counter.
Wrong Answers: Similar to futures contracts, margin requirements are normally imposed on option traders.
Although commissions for options are fixed per transaction, multple contracts may be involved in a transaction, thus lowering the commission per contract.
Currency options can be classified as either put or call options.
10. If a country's government imposes a tariff on imported goods, that country's current account balance will likely __________ (assuming no retaliation by other governments).
Answer: increase (but why?)
Answer: are usually issued in bearer form.
wrong answers: typically carry several protective covenants
cannot contain all provisions
17. The Single European Act and the Basel Accord prevented a trend toward increased globalization in the banking industry.
The answer is false but why?
18. The Eurocredit market primarily concentrates on:
Answer: medium-term lending.
wrong answers: short term lending (less than one year), long term lending, providing an exchange of foreign currencies for firms who need them, placing newly issued stock in foreign markets.
20. A futures contract is a contract specifying a standard volume of a particular currency to be exchanged on a specific settlement date.
True - but why?
21. If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it will need C$200,000 in 90 days to make payment on imports from Canada, it could:
Answer: obtain a 90-day forward purchase contract on Canadian dollars.
explain why this answer.
22. A large increase in the income level in Mexico along with no growth in the U.S. income level is normally expected to cause (assuming no change in interest rates or other factors) a(n) ______ in Mexican demand for U.S. goods, and the Mexican peso should _______.
Answer: increase; depreciate
24. When expecting a foreign currency to depreciate, a possible way to speculate on this movement is to borrow dollars, convert the proceeds to the foreign currency, lend in the foreign country, and use the proceeds from this investment to repay the dollar loan.
Answer: False (but why?)
31. Product cycle theory suggests that firms seek to penetrate new markets over time. Explain why.
35. The Single European Act of 1987:
Answer: increased competition in most industries.
Describe how and why?
37. The following regression model was run by a U.S.-based MNC to determine its degree of economic exposure as it relates to the Australian dollar and Sudanese dinar (SDD):
PCFt = a0 + a1et + mt
where the term on the left-hand side is the percentage change in inflation-adjusted cash flows measured in the firm's home currency over period t, and et is the percentage change in the exchange rate of the currency over period t. The regression was run over two subperiods for each of the two currencies, with the following results:
Currency Regression Coefficient (a 1)
Earlier Subperiod Regression Coefficient (a 1)
Australian dollar (A$) -.80 .10
Sudanese dinar (SDD. .20 .25
Based on these results, which of the following statements is probably not true?
The MNC was more sensitive to movements in the Australian dollar than in the dinar in the earlier subperiod.
The MNC was more sensitive to movements in the dinar than in the Australian dollar in the more recent subperiod.
The MNC probably had more outflows than inflows in Australian dollars in the earlier subperiod.
The MNC probably had more inflows than outflows denominated in dinar in the more recent subperiod.
All of the above are true.
Answers to questions on international finance with explanations.