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International Finance Problems

1) Relatively high Japanese inflation may result in an increase in the supply of yen for sale and a reduction in the demand for yen.
A)true.
B)false.

2) If an actual put option premium is less than what is suggested by the put-call parity relationship, arbitrage can be conducted.
A)true.
B)false.

3) A weak dollar is normally expected to cause:
A)high unemployment and high inflation in the U.S.
B)high unemployment and low inflation in the U.S.
C)low unemployment and low inflation in the U.S.
D)low unemployment and high inflation in the U.S.

4) If Lazer Co. desired to lock in the maximum it would have to pay for its net payables in euros but wanted to be able to capitalize if the euro depreciates substantially against the dollar by the time payment is to be made, the most appropriate hedge would be:
A)a money market hedge.
B)purchasing euro put options.
C)a forward purchase of euros.
D)purchasing euro call options.
E)selling euro call options.

Solution Preview

1) Relatively high Japanese inflation may result in an increase in the supply of yen for sale and a reduction in the demand for yen.
A) true.
B) false.
Answer: A) true.

Relatively high Japanese inflation would increase the cost of Japanese goods. This will reduce the demand of Japanese goods as the Japanese would like to substitute the local goods by imported goods. This will increase the supply of Yen for foreign currencies.
Increased cost of Japanese goods would reduce the demand for Japanese goods abroad. Thus the foreigners would demand lesser amounts of Japanese Yen for purchasing Japanese goods.

2) If an actual put option ...

Solution Summary

Answers multiple choice questions on international finance dealing with inflation, put option, weak dollar, payable, hedging.

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