2. Assume the return on a 1 year domestic bank CD equals 3%. The return on a 1 y
ID: 1103325 • Letter: 2
Question
2. Assume the return on a 1 year domestic bank CD equals 3%. The return on a 1 year European bank CD equals 5%. Assume there is no default risk and no other transactions to prevent exchange rate risk. If the euro is expected to depreciate by 4%, a saver will maximize her return by saving in:
a. The European bank CD
b. The US bank CD
3. Assume an American company sells $10 million in goods to a German firm. The American company will receive less than $10 million in revenues if (assume no transactions to prevent exchange rate risk):
a. They are paid in euros and the euro depreciates between the date of the order and payment
b. They are paid in dollars and the dollar appreciates between the date of the order and payment
c. They are paid in dollars and the dollar depreciates between the date of the order and payment
d. They are paid in euros and the euro appreciates between the date of the order and payment
4. Assume an initial exchange rate where $1 = €1. An American company sells $10 million in goods to a German firm. The American company will receive less than $10 million in revenues if (assume no transactions to prevent exchange rate risk):
a. They are paid in euros and the exchange rate equals $1.10 = €1 on the day of delivery and payment.
b. They are paid in euros and the exchange rate equals $0.90 = €1 on the day of delivery and payment.
c. They are paid in dollars and the exchange rate equals $1 = €1.10 on the day of delivery and payment.
d. They are paid in dollars and the exchange rate equals $1 = €0.90 on the day of delivery and payment.
5. Assume a US saver with $1,000 to place in a domestic or European bank CD.
The interest rate for US and European savings equals 4%.
Saving time period = 1 year
E = $1.00 (dollars per euro)
F = $1.02 (dollars per euro)
If the saver keeps her money in the US, her return equals ____. If the saver moves her money to Europe with a forward taken out at the time of purchase, her total return equals ____:
a. 4%, 4%
b. 6%, 4%
c. 4%, 2%
d. 4%, 6%
6. Assume a US saver with $1,000 to place in a domestic or European bank CD.
The interest rate for US and European savings equals 4%.
Saving time period = 1 year
E = $1.00 (dollars per euro)
F = $0.97 (dollars per euro)
If the saver keeps his money in the US, his return equals ____ . If the saver moves his money to Europe with a forward taken out at the time of purchase, his total return equals ____:
a. 4%, 4%
b. 4%, 1%
c. 7%, 4%
d. 4%, 7%
7. Assume a US saver with $1,000 to place in a domestic or European bank CD.
The interest rate for US and European savings equals 7%.
Saving time period = 1 year
E = $1.00 (dollars per euro)
F = $1.05 (dollars per euro)
If the saver keeps her money in the US, her return equals ____ . If the saver moves her money to Europe with a forward taken out at the time of purchase, her total return equals ____:
a. 7%, 7%
b. 12%, 12%
c. 7%, 12%
d. 12%, 7%
8. Assume a US saver with $1,000 to place in a domestic or European bank CD.
The interest rate for US and European savings equals 7%.
Saving time period = 1 year
E = $1.00 (dollars per euro)
F = $0.97 (dollars per euro)
If the saver keeps his money in the US, his return equals ____ . If the saver moves his money to Europe with a forward taken out at the time of purchase, his total return equals ____:
a. 7%, 7%
b. 3%, 3%
c. 3%, 7%
d. 7%, 3%
Explanation / Answer
2) the correct option is a) the European bank Cd because if the euro depreciates the person will get more of dollars.
3) The correct option is d), because the exchange rate euro/dollar will fall.
4) The answer is b because he will get $900000 in return
5 option d, because in forward he will get 4+((1.02-1)/1)*100 =4+2 =6%
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