Fina 4512 Problem Set 1 Solutions Essays

944 Words Sep 7th, 2014 4 Pages
FINA 4512
Problem Set 1
Choose the best answer for each question. Answer all questions. http://www.encyclopedia.com/doc/1G2-3045001189.html

1) American Standard Co. has a 90 day £1 million receivable. American Standard’s bank, Bank of America, suggests a 90 day forward contract. American Standard sells forward £1 million. American Standard is: a) Hedging. b) Speculating. c) Locking in an arbitrage profit.

Answer: Part a) Hedging is the correct answer.
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2) American Standard Co. has a 90 day £62,500 receivable. American Standard’s bank, Bank of America, suggests a put option contract that matures in 90 days. American Standard purchases one put option
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Goldbug Co. invests the funds from the sale of the gold in a government insured bank certificate of deposit for 90 days. The bank pays 4% interest on the certificate of deposit. Goldbug Co. is: a) Hedging. b) Speculating. c) Locking in an arbitrage profit.

Answer: c) Locking in an arbitrage profit is the correct answer because in this case, the amount earned including the profit is being locked by investing in the certificate of deposits and hedging is not the appropriate answer.
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5) An American purchases £1 million today and deposits the funds in a London bank for one year at an annual rate of 4%. She simultaneously sells forward (1 year contract) £1.04 million. She earns more than she would have earned, if she had deposited her funds in a bank in the United States. She is: a) Hedging. b) Speculating. c) Locking in an arbitrage profit.

Answer: c) Locking in an arbitrage profit is the correct answer.
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6) A German sells €1 million and deposits dollars in a United States bank for one month. She believes that the euro will depreciate and will use the dollars from her United States bank account to purchase euro in the spot market in one month. She is: a) Hedging. b) Speculating. c) Locking in an arbitrage profit.

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Answer: b) Speculating is the

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