Question

28. Purchasing Canadian dollars in Canada’s Forex market and then selling them later in England, once the Canadian dollar has appreciated, can be described as   ----                         
29. 1. a forward premium
    2. currency arbitrage
    3. a forward contract
    4. hedging

29. Consider a U.S. trader who will receive a shipment of raw materials from a Mexican supplier. However, he expects the dollar to depreciate by the time the shipment reaches him. If the current spot exchange rate is $1 = 12.66 Mexican peso, identify the correct statement form the following.
    1. The trader should use the spot exchange rate prevailing at the time of receiving the shipment of raw materials to make his payments to the Mexican suppliers.
    2. The trader is likely to benefit if he enters into a forward contract.
    3. The U.S. trader will earn a forward premium by entering into a forward contract if his expectations about the dollar’s value are realized.
    4. The Mexican supplier is likely to benefit if he enters into a forward contract.

30. Suppose a Japanese investor has ¥50,000 to invest for a year. He has the following information to help him choose between a Japanese certificate of deposit and an Indian certificate of deposit. The Indian currency, rupee, is denoted here by R.

ER/¥ = 0.545, E^e    = 0.452

iR = 6 percent, i¥ = 2 percent

Identify the correct statement from the following.

1. He will invest the money in the Japanese CD because the return on the Indian investment is -12.09 percent.
2. He will invest in the Indian CD because the rate of return is likely to be 24.09 percent.
3. He will invest in the Indian CD because the rate of return is likely to be 27.78 percent.
4. He will invest in the Japanese CD because the rate of return on the Indian CD is likely to be -15.4 percent.

31. The flow of FDI refers to the amount of FDI undertaken over a given time period (e.g., a year) whilst the stock of FDI refers to the total accumulated value of foreign-owned assets at a given time (which takes into account possible divestment along the way).
32. 1. False
    2. True

Answer 1

The correct answer to the first Question is B - Currency Arbitrage

We need to first understand the all the terms mentioned in the question

A Forward Premium- It is the premimum that one needs to purchases of a forward contract needs to pay in order to enter into a forward Contract. In this Case there is no mention of Forward Contract.

A Forward Contract - It is a legal agreemenet whereby the buyer of the forward is obligated to buy from the seller of a contract at a predermined rate in future. There is no mention that the buyer has an obligation to buy or sell any currecny .

Hedging - It is done in order to lower/minimize the loses or exposure to a fall in value of assets in future. A simple example of Hedging in order to understand can be an insurance.

Now, we com to Currency Arbitrage - Currency Arbitrage refers to simultaneous buying and selling of curencies in different markets in order to make gains/profits out of the difference in prices of the same currency in two or more markets . Here we see that purchase of Canadian Dollar from Cananda and thereafter selling it in England in order to gain from the differences in the prices Canadian Dollar in the two markets is a classic example of Currency Hedging.