TRUE or FALSE

1. Triangular arbitrage is feasible if there is an interest rate parity
2. The interest rate in the Philippines is 7%. The interest rate in Canada is 2%. The Philippine forward rate should exhibit a premium of about 5%.
3. All investors will receive similar returns if interest rate parity exists
4. Money is tied up for any length of time in a covered interest arbitrage

MULTIPLE CHOICE:

1. "JFINEX is a treasury trader at Metrobank. In order to manage the balance sheet of the bank and ensure that there is adequate PHP funding, which of the following instruments can he trade now suppose the bank has so much excess USD today?"

a. JFINEX can enter into an option to sell USD six months from now.

b. JFINEX can do an FX swap where in effect he buys USD in the far leg.

c. JFINEX can enter into a 1-year forward with some banks to protect his gains.

d. JFINEX can enter into a 3-month forward with some banks to speculate on the market.

2. "JFINEX Bank bought some 6-month USDPHP FX Swap from Metrobank three months ago. At inception or at the near leg, JFINEX Bank received PHP and delivered the equivalent USD to Metrobank at the prevaling spot price. Which of the following scenarios is accurate at the far leg or the swap maturity?"

a. JFINEX Bank receives PHP from Metroban at the agreed upon forward rate six months ago.

b. JFINEX Bank receives PHP from Metrobank at the prevailing spot rate today. Spot rate means settlement date

c. JFINEX Bank delivers PHP to Metrobank at the prevailing spot rate today.

d. JFINEX Bank delivers PHP to Metrobank at the agreed upon forward rate six months ago.

3. "On May 1 2021, a multinational corporation (MNC) based in the Philippines entered into a 3-month FX forward with JFINEX Bank, where the MNC buys USD at 48.90 at the end of three months in anticipation of its USD loan payment in August 2021. The following statements are most likely accurate EXCEPT: " a. The 3-month forward price of USDPHP on May 1 2021 is 48.90.

b. The 3-month forward price of USDPHP on August 1 2021 is 48.90.

c. The MNC will buy USD at 48.90 from JFINEX Bank even if the PHP depreciates greatly.

d. The MNC will buy USD at 48.90 from JFINEX Bank even if the PHP appreciates greatly.

4. JFINEX is selling a six-month FX PUT option on USD to a multinational corporation (MNC) at a premium amounting to X at strike/exercise price of Y. Which of the following will most likely happen?

a. JFINEX has the potential obligation to sell USD to MNC at Y at the end of six months.

b. JFINEX has the potential obligation to buy USD from MNC at Y at the end of six months.

c. JFINEX has the right to buy USD currency at Y at the end of six months.

d. JFINEX has the potential obligation to sell USD to MNC at X+Y at the end of six months.

5. One of the corporate motives for forecasting exchange rates is deciding whether the MNCs foreign subsidiaries should remit earnings to their parents. Suppose an analyst of a Filipino parent company with subsidiaries across the US strongly believes that the peso will weaken considerably within the next three months. Which of the following should be the recommendation of the analyst to the managers?

a. The parent company should enter into a three-month long USDPHP forward in order to protect itself from FX risks.

b. The parent company should ask the US subsidiaries to remit earnings as soon as possible given the expected peso depreciation.

c. The parent company should wait for three months before asking the subsidiaries to remit earnings to maximize peso value.

d. The parent company should be indifferent on the timing of the earnings remittance since the cash flows are not affected by FX.

6. "JFINEX is explaining to his colleague how he was able to capitalize on some mispricing in the FX market during his trip to Myanmar. In a country where the most accepted currencies are Myanmar kyat (MMK), Malaysian ringgit (MYR) and US dollars (USD), JFINEX explains that an outright spot exchange of USD to MMK in the airport FX desk will result in fewer MMK compared to when USD is exchanged to MYR and then MYR is exchanged to MMK. Which of the following best describes this type of arbitrage?"

a. Triangular arbitrage

b. Locational arbitrage

c. Uncovered FX arbitrage

d. Covered interest arbitrage

7. "JFINEX Bank sold a 1-year FX CALL option on USD to a multinational corporation (MNC) based in the Philippines at a premium amounting to X at strike/exercise price of Y. Suppose at the end of one year, USDPHP spot rate is P and USDPHP 1 yr forward rate is Q, which of the following statements is accurate?"

a. "At inception, MNC pays JFINEX Bank Y for the purchase of the call option."

b. JFINEX Bank receives X when the option matures a year after.

c. JFINEX Bank sells USD at Y should the option holder chooses to exercise the right at maturity.

d. "Should MNC exercise the right at maturity, JFINEX Bank buys USD at Y from MNC."

8. JFINEX is selling a three-month FX CALL option to a multinational corporation (MNC) at a premium amounting to X at strike/exercise price of Y. Which of the following will most likely happen?

a. JFINEX has the right to sell the currency at Y at the end of three months.

b. JFINEX pays the MNC X.

c. MNC has the obligation to buy the currency at Y at the end of three months.

d. MNC pays JFINEX X.

9. "JFINEX, a multinational company based in Korea, entered into an agreement with Metrobank on the company's management of its foreign currencies. As per the agreement, JFINEX will automatically convert all excess foreign currencies in their receivable books to Metrobank at the end of every month at the prevailing spot rate through the bank. This agreement will go on for the next two years. Which of the following FX instruments most likely describe this agreement?"

a. FX Options

b. FX Swap

c. FX Spot

d. FX Futures

10. "JFINEX is explaining to his colleague how he was able to capitalize on some mispricing in the FX market during his trip to Myanmar. In a country where the most accepted currencies are Myanmar kyat (MMK), Malaysian ringgit (MYR) and US dollars (USD), JFINEX explains that an outright spot exchange of USD to MMK in the airport FX desk will result in fewer MMK compared to when USD is exchanged to MMK at the hotel. Which of the following best describes this type of arbitrage?"

a. Triangular arbitrage

b. Uncovered FX arbitrage

c. Covered interest arbitrage

d. Locational arbitrage

10. "Six months ago, a multinational corporation (MNC) based in the Philippines entered into a 6-month FX forward with JFINEX Bank, where the MNC buys USD at 48.50 at the end of six months in anticipation of its USD loan payment today (which is the maturity of the forward). The following statements are most likely accurate EXCEPT: "

a. The 6-month forward price of USDPHP today is 48.50.

b. The 6-month forward price of USDPHP six months ago is 48.50.

c. The MNC will buy USD at 48.50 from JFINEX Bank even if the PHP depreciates greatly.

d. The MNC will buy USD at 48.50 from JFINEX Bank even if the PHP appreciates greatly.

11. "JFINEX is a treasury trader at Metrobank. Apart from managing the balance sheet of the bank, he is also tasked to generate profit from Trading activities including FX instruments. Suppose he believes that the PHP will strenghten considerably in the next three months months, which of the following trade scenarios is most likely to occur?"

a. JFINEX does a 3-month USDPHP FX forward trade where he is short USD.

b. JFINEX does a 3-month USDPHP FX forward trade where he is long USD

c. JFINEX does a 1-yr USDPHP FX forward trade where he is short USD.

d. JFINEX does a 1-yr USDPHP FX forward trade where he is long USD.

12. "Three months ago, a multinational corporation (MNC) based in the Philippines entered into a 3-month NDF FX forward with JFINEX, where the MNC is LONG USD at an agreed-upon price of 48.50. Suppose the spot rate on today (which is the maturity of the forward) is USDPHP 44.35, which of the following will most likely happen?"

a. JFINEX sells USD to MNC at 44.35 today.

b. MNC sells USD to JFINEX at 44.35 today.

c. JFINEX pays MNC (48.50 minus 44.35) pesos for every dollar.

d. MNC pays JFINEX (48.50 minus 44.35) pesos for every dollar.

13. "JFINEX Bank sold a 1-year FX PUT option on USD to a multinational corporation (MNC) based in the Philippines at a premium amounting to X at strike/exercise price of USDPHP 47.50. Suppose at the end of one year, USDPHP spot rate is 47.25 and USDPHP 1 yr forward rate is 48.50, which of the following is the most logical thing to happen?"

a. JFINEX Bank will sell USD to MNC at 47.50.

b. JFINEX Bank will buy USD from MNC at 47.50.

c. JFINEX Bank will buy USD from MNC at 48.50.

d. JFINEX Bank will sell USD from MNC at 48.50.

14. "JFINEX is a treasury trader at Metrobank. Apart from managing the balance sheet of the bank, he is also tasked to generate profit from Trading activities including FX instruments. Suppose the current 1-yr USDPHP forward is 45.00. If he believes that the peso will continue to perform strongly against the dollar until next year, which of the following deal should he do?"

a. JFINEX should do a 1-yr FX forward deal where he buys USD at the spot rate in one year.

b. JFINEX should do a 1-yr FX forward deal where he buys USD 45.00 in one year.

c. JFINEX should not do the FX forward at all and just buy USD at the spot rate a year from now.

d. JFINEX should buy an FX call option on USD as it gives him some level of flexibility.

15. "JFINEX Bank sold a 1-year FX CALL option on USD to a multinational corporation (MNC) based in the Philippines at a premium amounting to X at strike/exercise price of Y. Suppose at the end of one year, USDPHP spot rate is P and USDPHP 1 yr forward rate is Q, which of the following statements is accurate?"

a. JFINEX Bank receives Y when the option matures a year after.

b. "At inception, MNC pays JFINEX Bank X for the purchase of the call option."

c. JFINEX Bank buys USD at Y should the option holder chooses to exercise the right at maturity.

d. "Should MNC exercise the right at maturity, JFINEX Bank buys USD at Y from MNC."

- Explanation