FM G Risk management

The risk that exchange rates change between agreeing and settling a transaction is called:

• 1 Basis risk
• 2 Translation risk
• 3 Transaction risk
• 4 Economic risk

Purchasing power parity says that exchange rates change to reflect differences in:

• 1 Population
• 2 Interest rates only
• 3 Inflation
• 4 Tax rates

The spot rate is 100 foreign currency units per $1. Annual interest is 8 percent in the foreign currency and 3 percent in dollars. What is the one-year forward rate under interest rate parity?

• 1 103.92
• 2 108.00
• 3 95.37
• 4 104.85

The spot rate is 100 per $1. Inflation is 6 percent in the foreign currency and 2 percent in dollars. What is the expected spot rate in a year under PPP?

• 1 106.00
• 2 104.85
• 3 94.34
• 4 103.92

Which is a way of hedging currency risk by offsetting receipts and payments in the same currency?

• 1 Lagging
• 2 Factoring
• 3 Leading
• 4 Netting

What does a forward exchange contract do?

• 1 Removes all risk
• 2 Guarantees a profit
• 3 Fixes the rate for a future date
• 4 Cancels the transaction

What is gap exposure in interest rate risk?

• 1 The gap between tax and interest
• 2 The gap between profit and cash
• 3 The difference in the amounts of assets and liabilities that reprice at different times
• 4 The difference between two currencies

What does a forward rate agreement (FRA) do?

• 1 Fixes the tax rate
• 2 Fixes the share price
• 3 Fixes an exchange rate
• 4 Fixes the interest rate for a future period

Which theory says that long-term interest rates reflect expected future short-term rates?

• 1 Expectations theory
• 2 Liquidity preference theory
• 3 Purchasing power parity
• 4 Market segmentation