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1. Rexburg Industries exported bulldozers to a German construction company. Rexburg received payment of 5,000,000 in one year. Rexburg hedged this transaction by purchasing a put option to sell EUR for USD at a strike price of $1.25/1. The cost of this put option was $0.02 per euro. The spot rate at maturity was $1.20/1. How much did Rexburg profit by hedging this transaction? Assume an annual risk-free interest rate of 5.0 percent.

Multiple Choice

• $145,000

• $262,500

• None of the options.

• $250,250

3.

Consider the following interest rates, and spot and forward exchange rates. Can an investor earn an arbitrage profit?

	Borrowing		Lending			Bid		Ask
$	5%		4.5%		Spot	$1.00 = 1.00		$1.01 = 1.00
	6%		5.5%		Forward	$0.99 = 1.00		$1.00 = 1.00

Multiple Choice

• No, since an investor can borrow USD at 5% for a yield of 5%.

• Yes, since an investor can borrow USD at 5% for a yield of 5.5%.

• Yes, since an investor can borrow EUR at 6% for a yield of 6.5%.

• No, since an investor can borrow EUR at 6% for a yield of 5.5%.

• No, since an investor can borrow EUR at 6% for a yield of 5%.

4.

HealthSouth, Tyco, Waste Management, WorldCom, Enron, and Parmalat scandals show that:

Multiple Choice

• socialism is preferred to capitalism.

• government is better at monitoring corporate behavior than shareholders.

• white-collar criminals are seldom held accountable for corporate malfeasance.

• managers who pursue their own self-interests do so at the expense of shareholders.

• None of the options.

• $125,000

2.

A countrys choice between a fixed or floating exchange rate regimes involves a trade-off between:

Multiple Choice

• exchange rate uncertainty and national monetary policy autonomy.

• unemployment and inflation.

• national monetary policy autonomy and international economic integration.

• None of the options.

• balance of payments autonomy and inflation.

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