Question Details

The proper formula for interest rate parity is given by 



1. 	The proper formula for interest rate parity is given by _______. 		
a.   (1 + rf(UK))/(1 + rf(US)) = F1/E0
	b.   (1 + rf(US))/(1 + rf(UK)) = E0/F1
	c.   (1 + rf(US))/(1 + rf(UK)) = F0/E0
	d.   (1 + rf(US))/(1 + rf(UK)) = F0/E1
2. 	Investor portfolios are notoriously over weighted in home country stocks. This is 	commonly called ________. 						

	a.   local fat
	b.   patriotism
	c.   home country bias
	d.   misleading representation
3. 	A U.S. insurance firm must pay €75,000 in 6 months. The spot exchange rate is 	$1.32 per euro and in 6 months the exchange rate is expected to be $1.35. The 6 	month forward rate is currently $1.36 per euro. If the insurer's goal is to limit its 	risk should the insurer hedge this transaction? If so how? 			
a.  The insurer need not hedge because the expected exchange rate move will be 	favorable.
	b.  The insurer should hedge by buying euro forward even though this will cost 	more than the expected cost of not hedging.
	c.  The insurer should hedge by selling euro forward because this will cost less 	than the expected cost of not hedging.
	d.  The insurer should hedge by buying euro forward even though this will cost 	less than the expected cost of not hedging.
4. 	The risk-free interest rate in the US is 8% while the risk-free interest rate in the 	UK is 15%. If the 1-year futures price on the British pound is $2.40, the spot 	market value of the British pound today should be __________. 	
	a.   $1.93
	b.   $2.22
	c.   $2.56
	d.   $2.76
 5. 	The dollar per euro spot rate is 1.2 when an importer of French wines places an 	order. 6 months later, when she takes delivery, the spot rate is 1.3 dollars per 	euro. If her original invoice was for 30,000 euro, what is her gain or loss due to 	exchange rate risk? 								
a.   $3,000 gain
	b.   $3,000 loss
	c.   $6,000 loss
	d.   no gain or loss



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