FNCE 90016 Mid-Semester Exam

Instructions

Mid-semester Exam Instructions:

  • This mid-semester exam consists of 16 questions – the first is an unmarked question about academic integrity.  The remaining 15 questions are all worth one mark each.
  • The time limit is one hour and there is no additional reading time to this.  Please ensure you find a suitable time and place to take the exam that will allow you to have uninterrupted access to the LMS for its duration.
  • As per University guidelines related to academic integrity, questions are randomised at the topic level.
  • Once you have begun the exam, your answers must be finalised at the end of the one hour time limit and you will not be able to retake the test via the LMS.
  • The exam will display one question at a time but you can move forward and backwards through the test until the end of the one hour time limit (i.e. questions are not locked when you answer them).
  • You will not receive your grade or feedback on individual questions until after the mid-semester has been completed by all students and reviewed by myself.
  • The exam is open book – you may consult course materials and online resources during the test. You must not discuss the exam questions or your solutions with any other student until Thursday’s completion deadline has passed.  Doing so is a breach of the University’s academic integrity requirements.
  • This mid-semester exam is worth 20% of your final grade for FNCE90016.

Plagiarism declaration

By submitting work for this quiz I hereby declare that I understand the University’s policy on academic integrity and that the work submitted is original and solely my work, and that I have not been assisted by any other person (collusion) apart from where the submitted work is for a designated collaborative task, in which case the individual contributions are indicated. I also declare that I have not used any sources without proper acknowledgment (plagiarism). Where the submitted work is a computer program or code, I further declare that any copied code is declared in comments identifying the source at the start of the program or in a header file, that comments inline identify the start and end of the copied code, and that any modifications to code sources elsewhere are commented upon as to the nature of the modification.

Question 1

The University of Melbourne expects students to conduct themselves in a manner which is fair, honest and consistent with the principles of academic integrity, particularly when undertaking assessment and research.

True

False

Question 2

Under a gold-standard, if Country A persistently exports more goods and services to Country B than B does to A, the price-specie-flow mechanism predicts:

A rise in the domestic price level of Country B and a fall in the domestic price level of Country A.  This will increase the initial trade imbalance over time.

None of the other answers.

A rise in the domestic price level of Country B and a fall in the domestic price level of Country A.  This will help to correct the trade imbalance over time.

You Answered

A rise in the domestic price level of Country A and a fall in the domestic price level of Country B.  This will increase the initial trade imbalance over time.

Correct Answer

A rise in the domestic price level of Country A and a fall in the domestic price level of Country B.  This will help to correct the trade imbalance over time.

Question 3

/ 1 pts

Your company is an Australian-based manufacturer that exports the majority of its products to the US.  Your company competes with domestic manufacturers in the US.  Suppose the Australian dollar appreciates relative to the US dollar.  Your company is likely to:

be unaffected by these changes.

None of the other answers.

gain market share over its US-based competitors.

increase its sales to the US, improve its AUD profits per unit of US sales or both.

suffer a fall in sales to the US, reduce its AUD profits per unit of US sales, or both.

Question 4

/ 1 pts

The following is an example of a market imperfection:

None of the other answers.

Unpredictable fluctuations in exchange rates.

Changes in supply and demand in a country where you have an economic presence.

Correct Answer

The existence of tariffs and subsidies on the value of internationally traded goods and services.

You Answered

Unexpected changes in legislation in a country where you have an economic presence.

Question 5

How would the following transaction be recorded in the Australian balance of payments:

An Australian company, Aeon Metals, sells 100,000 ounces of silver to a China-based producer of photo-voltaic cells for AUD 18 / ounce.

Correct Answer

There will be a credit in the Australian current account for AUD 1.8m. There will be a debit in the capital account for AUD 1.8m.

There will be a debit in the Australian current account for AUD 1.8m. There will be a credit in the capital account for AUD 1.8m.

There will be a credit in the Australian current account for AUD 1.8m. There will be a debit in the current account for AUD 1.8m.

There will be a credit in the Australian capital account for AUD 1.8m. There will be a debit in the capital account for AUD 1.8m.

None of the other answers.

Question 6

/ 1 pts

How would the following transaction be recorded in the Australian balance of payments:

An Australian hedge fund, Global Capital Partners, purchases AUD 200 million of German Government Bonds (“Bunds”) from an Australian pension fund, Unisuper.

There will be a credit in the capital account for AUD 200 million and a debit in the current account for AUD 200 million. The debit will be recorded under “foreign direct investment”.

None of the other answers.

There will be a credit and a debit in the capital account for AUD 200 million. The debit will be recorded under “portfolio investment”.

There will be a credit in the capital account for AUD 200 million and a debit in the current account for AUD 200 million. The debit will be recorded under “portfolio investment”.

There will be a credit and a debit in the capital account for AUD 200 million. The debit will be recorded under “foreign direct investment”.

Question 7

/ 1 pts

During a currency crisis:

None of the other answers.

Sudden and unexpected currency depreciations tend to have positive effects in the short-term as their primary effect is to immediately help boost the export sector of the country.

We only rarely observe large flows of credit into the economy prior to the crisis.

Correct Answer

Weak economic conditions can put downward pressure on the exchange rate and vice versa. These forces can act to form a “vicious cycle” that amplify the crisis.

You Answered

Portfolio flows from international investors usually help the Central Bank to accumulate greater foreign exchange reserves, compared with prior to the crisis.

Question 8

/ 1 pts

Suppose you are a customer in the FX market and you observe the following quotes for FX spot trades of AUD vs. the USD and JPY vs. the USD:

Bid Ask
S(JPY/USD) 107.40 107.55
S(USD/AUD) 0.6110 0.6120

At what price could you as a customer buy AUD and sell JPY?  Answer as a direct quote for AUD / indirect quote for JPY.

None of the other answers.

Correct Answer

65.82

65.62

You Answered

0.0152

176.02

Question 9

/ 1 pts

Suppose you are a customer in the FX market and observe the following quotes for FX spot trades of AUD vs. the USD, USD vs. the GBP and AUD vs. the GBP with three dealers A, B and C:

Dealer Currency Pair Bid Ask
A S(USD/GBP) 1.2466 1.2479
B S(USD/AUD) 0.6110 0.6120
C S(GBP/AUD) 0.4890 0.4912

At these rates:

There is an arbitrage opportunity and it involves selling AUD and buying GBP with Dealer C at 0.4890.

There is an arbitrage opportunity and it involves buying AUD and buying GBP with Dealer C at 0.4912.

There is an arbitrage opportunity and it involves selling AUD and buying GBP with Dealer C at 0.4912.

Correct Answer

None of the other answers.

You Answered

There is an arbitrage opportunity and it involves buying AUD and selling GBP with Dealer C at 0.4890.

Question 10

/ 1 pts

The bid and ask prices for the AUD vs. the USD are:

Sbid(USD/AUD) = 0.6110

Sask(USD/AUD) = 0.6139

The bid price for USD against the AUD, in European terms, is:

1.6367

0.6110

None of the other answers.

0.6139

Correct!

1.6289

Question 11

/ 1 pts

Suppose that the one year interest rate on US Treasury Bonds is 5% and the expected inflation rate in the United States over the next year is 1.9%.  The one year interest rate on New Zealand Government Bonds is 4% and the expected inflation rate in New Zealand over the next year is 2.4%.  According to relative purchasing power parity, the expected spot exchange rate E[S(USD/NZD)] in one year from now is:

You Answered

is 0.49% higher than the current spot rate, S(USD/NZD).

is 0.96% higher than the current spot rate, S(USD/NZD).

is 0.96% lower than the current spot rate, S(USD/NZD).

None of the other answers.

Correct Answer

is 0.49% lower than the current spot rate, S(USD/NZD).

Question 12

/ 1 pts

You are a hedge fund looking for arbitrage opportunities between the spot FX market and 3 month FX forwards and money markets.  You observe the following quotes from market makers in these markets for JPY and USD:

Bid Ask
S(JPY/USD) 107.40 107.55
F3m(JPY/USD) 106.90 107.00

 

Annualised 3m Lending Rate Annualised 3m Borrowing Rate
JPY 0.15% 0.25%
USD 0.40% 0.50%

You can borrow a face value of up to USD 1 million or lend a face value of up to USD 1 million by borrowing in JPY.  At these prices, you can make a certain dollar profit in 3 months’ time (to the nearest whole number) of:

None of the other answers.

JPY 306,142

Correct!

USD 2,861

USD 242

USD 5,704

Question 13

/ 1 pts

The current USD vs. JPY spot rate is S(JPY/USD) = 107.00. In one month, the spot rate can take one of two values: 103.00 and 110.00.   Annualised one month interest rates are 1% in Japan and 2% in the United States. To the nearest 1,000 yen, what is the no-arbitrage JPY price of a one month call on USD 250,000 vs. the JPY with strike price equal to the current spot price, ignoring any possible transaction costs?

Correct Answer

419,000

2926

You Answered

313,000

3,913

None of the other answers.

Question 14

/ 1 pts

The current EUR vs. USD spot rate is S(USD/EUR) = 1.15. In two months, the spot rate can take one of two values: 0.95 and 1.30.  Annualised two month interest rates are 4% in the Eurozone and 8% in the United States. To the nearest dollar, what is the no-arbitrage USD price of a two month put on EUR 100,000 vs. the USD with strike price equal to current spot, ignoring any possible transaction costs?

4,866

Correct Answer

8,029

You Answered

5,596

6,982

None of the other answers.

Question 15

/ 1 pts

You have a long position in the USD vs. the Swiss Franc (CHF) via the futures market.  The position size is one contract and the contract size is USD 100,000.  The strike price of the contract at inception is S(CHF/USD) = 0.9600.  You are required to post an initial performance bond of CHF 3,500 on the position.  The maintenance performance bond is CHF 1,000.  Which of the following is correct:

You Answered

You are not required to post additional collateral until your mark-to-market losses against the settlement price exceed your initial performance bond.

If the settlement price reaches 0.9900, you will be required to post additional collateral to your margin account.

Correct Answer

None of the other answers.

If the settlement price reaches 0.9400, you will be required to post additional collateral to your margin account.

In the event of mark-to-market losses against the settlement price that exceed CHF 2,500, you must post additional collateral to your margin account to ensure the balance is equal to the level of the maintenance performance bond.

Question 16

/ 1 pts

Consider a European call option on EUR vs. USD and a European put option on EUR vs. USD.

Both options have six months maturity, are struck at the current spot price and interest rates are equal in the Eurozone and US.

Which of the following is true:

There is not enough information to answer this question.

The call has positive delta with respect to the spot price S(USD/EUR).  The put has positive delta with respect to the spot price S(USD/EUR).

The call has negative delta with respect to the spot price S(USD/EUR).  The put has positive delta with respect to the spot price S(USD/EUR).

None of the other answers.

Correct!

The call has positive delta with respect to the spot price S(USD/EUR).  The put has negative delta with respect to the spot price S(USD/EUR).

Quiz Score: 5 out of 15