Answered: What is the relationship or link…

Business

Finance

What is the relationship or link between the forward rate and the foreign currency option premium?

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter11: Managing Transaction Exposure

Section: Chapter Questions

Problem 1CT

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Concept explainers

Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in the near past and is expected to be more affluent in the future. The use of exchange-traded derivative financial instruments has been multi-folded to provide for the requirements of various MNCs and offshore potential investors. Most banks and financial institutions have helped integrate the global economies. Our Government has introduced some bold and extreme measures to fulfil the purpose behind the fiscal, industrial, and monetary policies. The enactment of GST is a huge step towards streamlining the taxation system of the country. Owing to Covid-19, this aspect of corporate risk management has become critical.

Question

What is the relationship or link between the forward rate and the foreign currency option premium?

An option's value declines over time, but it does not do it evenly. Explain what that means for option valuation?

Classify the following as a transaction reported in a sub-component of the current account or the capital and financial accounts of the two countries involved:

An American tourist pays for a hotel in Paris with his American Express card.

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Let i be home interest rates, i* a foreign interest rates and p be the forward foreign exchange premium (=F/S-1). Assume there is a transaction cost equal to C incurred in any covered interest rate arbitrage. Write down the relation by which incentives are present for money to move from the foreign country to home.
Which of the following statement is NOT true regarding the spot rate and forward rate? a. Forward rate can be calculated using the spot rate, the interest rate for domestic investment, and the foreign investment interest rate. b. Forward rate should be higher than the spot rate at the beginning of a forward contract. c. Forward rate is the rate of exchange at a future point in time. d. Spot rate is the current rate of exchange.
How do I backdate settlement prices on the Chicago Mercantile Exchange? Or is there another exchange that allows you to backdate settlement prices? Also, how do you calculate the cumulative gain closing out a market to market position on long contracts?
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dont use chat gpt Which of the following option is false? Select the most suitable answer. Select one: a. Forward contracts are popular in foreign exchange market. b. The value of short forward increases as the price of the asset decreases. c. A 1-year forward contract is an agreement where one counterparty has the obligation to buy an asset for the market price in 1-year time from the other counterparty. d. Forward contracts are not traded in any exchanges across the world. e. Forward contracts are negotiated before inception.
Assume that interest rate parity holds. When a currency trades at a forward premium,what does that imply about domestic rates relative to foreign interest rates? When acurrency trades at a forward discount?
5. The second currency named in an FX quote is called the: A. basis currency B. base currency C. unit currency D. quote or counter currency 6. A difference arises between the bid and ask rates of foreign currency because: A. the rates are between different dealer banks B. of arbitrage opportunities between currencies C. foreign exchange dealers need to earn income D. it takes time to find buyers or sellers of foreign currency
For the statements below indicate if it is true or false. If the statement is false, rewrite so that it is a true statement. Use the space available to answer your question. 1. Foreign exchange markets are markets in which people of one country exchange goods with people from another country. TRUE/False: 2. When the actual foreign exchange rate for the dollar is greater than the equilibrium rate, the dollar is undervalued, meaning that it will buy less in international trade than it will buy at home. TRUE/False : 3. For any given interest rate, the shorter the time period before the receipt a dollar, the lower is its present value. TRUE/False :
Choose a,b,c,d,e for the following: Question 10 - Which of the following is true? a. An indirect quote is the foreign currency price of the foreign country. b. A forward contract prevents upside gain. c. Gilt arises out of an action you cannot tell your parents about. d. If the market rate exceeds the cross rate, no-arbitrage is possible. e. The violation of interest rate parity motivates the activation of triangular arbitrage.
For a U.S. trader working in American quotes, if the forward price is higher than the spot price: a. The currency is trading at a premium in the forward market. O b. The currency is trading at a discount in the forward market. O. Then you should buy at the spot, hold on to it and sell at the forward it's a built-in arbitrage. I on O d. All of the above it really depends if you're talking American or European quotes.
Explain, why appreciation of exchange rate (E) today results in the increase of expected return from foreign currency deposits (investments), assuming expected exchange rate does not change?
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