1. The current spot exchange rate is 3.75 BRL per US dollar, the one-year forward rate is 3.95, and the one-year US interest rate is 2%.
a. The implied interest rate offered by the BRL forward contract is 5.3%.
b. The implied interest rate offered by the BRL forward contract is 7.4%.
c. The implied interest rate offered by the BRL forward contract is -5.1%.
d. The implied interest rate cannot be calculated using the information provided.
e. None of the above.
2. Please circle all of the correct statements below about foreign exchange forward and futures contracts.
a. Futures contracts are traded on an exchange, while forward contracts are traded over the counter.
b. Forward contracts have standardized delivery dates, while futures contracts have tailored delivery dates.
c. Forward contracts can be non-deliverable, while futures contracts are always deliverable.
d. Forward contracts bear counterparty credit risk, while futures contracts bear the credit risk of the exchange.
e. Forward contracts do not involve credit risk, while futures contracts bear the credit risk of the exchange.
3. Please circle all of the correct statements below about the market value of a forward contract.
a. The market value of a forward contract is always zero.
b. The market value of a forward contract at initiation is always zero.
c. The market value of a forward contract at maturity depends only on the forward rate, the spot exchange rate at maturity, and the notional value of the contract.
d. The market value of a forward contract at maturity is always zero.
e. None of the above statements are true.
4. Please circle all of the correct statements below about arbitrage in foreign exchange markets. Assume that free capital mobility exists between financial centers (such as New York, London, and Tokyo).
a. Locational arbitrage ensures that exchange rate quotes are aligned across financial centers.
b. Locational arbitrage ensures that interest rates in different currencies are equalized across financial centers.
c. Covered interest parity ensures that the forward premium equals the interest differential between two currencies.
d. Covered interest parity ensures that interest rates in different currencies are equalized across financial centers.
e. None of the above statements are true.
5. A large Asian sovereign wealth fund purchases a 15% stake in Apple’s listed stock on the Nasdaq exchange. This transaction would appear in the financial account:
a. As a credit under foreign direct investment.
b. As a credit under portfolio investment.
c. As a debit under foreign direct investment.
d. As a debit under portfolio investment.
e. None of the above.