M.

Com COC 4A2: DERIVATIVES MARKET

MCQ- 4
CURRENCY FORWARDS/FUTURES - III

Consider the following rates

1. Consider the following rates

Rs./$ Spot 48.40/45
1 month 25/20
2 months 30/25
3 months 40/35
If an Indian exporter seeks to have an option of delivering dollar over third month,
then the bank will quote

a. Rs.48.00/$ b. Rs.48.10/$ c. Rs.48.15/$ d. Rs.48.70/$ e.

Answer: (a) Reason : Forward margin is in discount. Discount for 3 months is to be

given assuming that the Exporter may deliver the foreign currency on the last day of
the option period. Hence 3 months discount of 40 paise is to be deducted from the bid
rate of Rs.48.40. Bank will quote Rs.48.00/$.

2. If £/Euro is 0.6338/40 and $/£ 1.5265/67, the synthetic Euro/$ bid rate is
a. Euro 1.0331/$ b. Euro 1.0333/$ c. Euro 1.0335/$ d. Euro 1.0336/$ e. Euro 1.0338/$.

3.
 3

4. The following are the exchange rates quoted in Singapore S$/Euro : 2.0118/21
S$/US$ : 1.7384/86 The synthetic rates of US $/Euro are

(a) 1.1572/73 (b) 1.1571/74 (c) 0.8640/41 (d) 0.8639/42 (e) 3.4977/79.

5. If the Euro is quoted $ 1.1410 today and the inflation rates are 2% in Euro-zone and
3% in USA, what < Answer > should be the $/Euro quote after 3 months?
 (a) $ 1.1382/Euro (b) $ 1.1438/Euro (c) $ 1.1522/Euro (d) $ 1.1300/Euro
(e) $ 1.1466/Euro.

6. The pound sterling quote of a bank is Rs.81.79 / 84. If the banker agrees to quote a
better rate by 2 paise to an Exporter, who is selling £200000, the rate quoted is

(a) Rs.81.77 (b) Rs.81.86 (c) Rs.81.81 (d) Rs.81.83 (e) Rs.81.82.

Answer : (c) Reason : Bid rate for pound is Rs.81.79. This means banker gives Rs.81.79 to take one
pound. If banker agrees to quote a better rate he pays still more by 2 paise to take one pound. So 2
paise is to be added to the bid rate. Correct answer is Rs.81.81. 23.

7. A banker who relied on the interbank rate of Rs./$ 43.06/10 is requested by an

Exporter for purchase of dollars. What is the rate to be quoted if the banker wants a
margin of 0.10%?

(a) Rs.43.14 (b) Rs.43.02 (c) Rs.43.10 (d) Rs.43.06 (e) Rs.43.12.

8. The relationship between the exchange rate and the prices of tradeable goods is
known as the

(a) Purchasing power parity theory (b) Asset markets theory (c) Portfolio balance theory
(d) Interest rate parity theory (e) Fisher open condition.
9. If U.K. interest rates are higher than Japanese interest rates, the theory of covered
interest arbitrage would suggest that in the £/Yen exchange markets the Yen would
be at a forward _________ and the pound would ___________.

(a) Discount, be at a forward premium (b) Discount, also be at a forward discount (c)
Premium, also be at a forward premium (d) Premium, be at a forward discount (e)
Discount, be stable.

Answer : (d) Reason : If U.K interest rates are higher than Japanese interest rates, the
theory of covered interest arbitrage would suggest that in the £/yen exchange markets,
the yen would be at a forward premium and the pound would be at a forward discount.

10. If interest rate parity holds and the transaction costs are zero, covered foreign
financing will result in an effective borrowing rate that is

(a) Less than domestic interest rate (b) Greater than domestic interest rate (c) Equal
to domestic interest rate (d) Less than domestic interest rate if forward rate is in
discount (e) Negative.

Answer : (c) Reason : According to the Interest rate parity or the covered interest
parity condition, the cost of borrowing money or the rate of return on financial
investments, when adjusted for the cost of covering foreign exchange risk is equal
across different currencies.

11. The relationship between the exchange rate and the prices of tradeable goods is known
as the

(a) Purchasing power parity theory (b) Asset markets theory (c) Portfolio balance
theory (d) Interest rate parity theory (e) Fisher open condition.

Answer : (a) Reason : The relationship between the exchange rate and the prices of
tradeable goods is known as the purchasing power parity theory.

12. The following are the exchange rates quoted in Singapore

S$/Euro : 2.0118/21 S$/US$ : 1.7384/86

The synthetic rates of US $/Euro are

(a) 1.1572/73 (b) 1.1571/74 (c) 0.8640/41 (d) 0.8639/42 (e) 3.4977/79.
 13. If U.K. interest rates are higher than Japanese interest rates, the theory of covered
interest arbitrage would suggest that in the £/Yen exchange markets the Yen would
be at a forward _________ and the pound would ___________.

(a) Discount, be at a forward premium (b) Discount, also be at a forward discount (c)
Premium, also be at a forward premium (d) Premium, be at a forward discount (e)
Discount, be stable.

Answer : (d) Reason : If U.K interest rates are higher than Japanese interest rates, the theory of
covered interest arbitrage would suggest that in the £/yen exchange markets, the yen would be at a
forward premium and the pound would be at a forward discount.

14. If a speculator observes that the current 90-day forward rate on Danish Kroner is
$0.20/DKr but he expects that the spot rate in 90 days will be $ 0.30 = DKr 1, then this
speculator would now

(a) Buy dollars in the forward market (b) Buy Danish kroners in the forward market (c) Sell
Danish kroners in the forward market (d) Buy Danish kroners on the spot market and
simultaneously sell Danish kroners on the 90 – day forward market if the current spot rate is $ 0.25 =
DKr 1 (e) Avoid taking any buy or sell position.

Answer : (b) Reason : If the speculator expects that the spot rate in 90 days is going to be $ 0.30 =
DKr 1 as against the present 90 days forward rate of DKr 1 = $0.20, then the speculator would now
buy Danish Kroner at DKR 1= $0.20. This will result in profit for the speculator. Assume that the
speculator purchased DKR 5 for US$1. After 90 days the speculator sells DKR 5 at $0.30 = DKr1. This
will result in inflow of dollars at (5 x 0.30) = $ 1.50 Profit = 1.50 – 1.00 = $0.50.

15. The relationship between the spot and forward exchange rates between a pair of
currencies is brought about principally through

(a) The Fisher effect (b) Purchasing power parity (c) Covered interest rate arbitrage
(d) Uncovered interest rate arbitrage (e) The law of one price.

Answer : (c) Reason : The relationship between the spot and forward exchange rates between
a pair of currencies is brought about principally through covered interest arbitrage. The fisher
effect says that the real interest rates are equal across different countries. Purchasing power
parity says that the exchange rate between two countries’ currencies is determined by the
respective price levels in the two countries. Correct answer is (c).

16. Consider the following:

$/₤ 1.6435/40

1 month 1 0/5

2 months 5/10

3 months 10/15

Which of the following statements is correct?

(a) 1 month forward bid rate is 1.6445 (b) 2 month forward ask rate is 1.6430 (c) 2 month
forward bid rate is 1.6430 (d) 3 month forward bid rate is 1.6425 (e) 3 month forward
ask rate is 1.6455.

Answer : (e) Reason : 3 months forward ask rate is 1.6455 (1.6440 + 0.0015).

17. Vijay purchased a draft for £500 from his banker to import books when the pound was
quoted at Rs.78.25/30. Since he could not import the books, he surrendered the draft
to his banker when the pound was quoted at Rs.78.35/40. For Vijay, this transaction
resulted in
(a) A profit of Rs.25 (b) A profit of Rs.50 (c) A profit of Rs.75 (d) A loss of Rs.25 (e)
A loss of Rs.50.

Answer : (a) Reason : Vijay purchased pounds at 78.30 and sold at 78.35. Thus the gain
per pound is 5 paise (78.35 – 78.30). The gain for 500 pounds is Rs.25.
18. Consider the following information:

One year U.S. interest rate is 4% (Compounded Quarterly) One year interest rate in
Mumbai is 5% (Compounded Quarterly) The six months forward rate for dollar is
Rs.46.00 What is the spot rate that creates interest rate parity?

(a) Rs.46.23 (b) Rs.46.32 (c) Rs.45.66 (d) Rs.45.77 (e) Rs.45.88.

19. The eurodollar interest rates in London are as under

1 month 3.00% p.a.

2 months 3.60% p.a.
3 months 4.00% p.a.
The one month interest rate after 2 months is expected to be
(a) 4.44% p.a. (b) 4.55% p.a. (c) 4.66% p.a. (d) 4.77% p.a. (e) 4.88% p.a.

20. An Indian exporter is expected to receive € 1,000,000 during the 3rdmonth. He

obtained the following market quotation

Spot Rs./€ = 55.32/35

Forward 1 month 02/03

2 month 03/04

3 month 04/05

The rate likely to be offered to the exporter is (ignore bank’s margin)

(a) Rs.59.36
 (b) Rs.55.35

(c) Rs.55.39

(d) Rs.55.38

(e) Rs.59.34.

Answer : (b) Reason : The swap points are low/high, hence Euro currency is at
premium, bid side points to be added to get forward bid rate, since the bank is buying
it will add two months premium assuming that the customer would exercise option at
the beginning of the month, in this case 3 month, hence, it will give 2 month premium.

21. If Rs./$ is 48.90/95 and Rs./£ is 70.80/85, then implied $/£ quote would be
(a) 0.6907/0.6909 (b) 0.6913/0.6918 (c) 1.4474/1.4479 (d) 1.4464/1.4489 (e)
1.4479/1.4489.

Answer : (d) Reason : The implied $/£ quote is 1.4464/1.4489 $/£ bid rate =
($/Rs.) bid × (Rs./£) bid
= × (Rs./£) bid

= 1.4464
$/£ ask rate = = 1.4489