FIN410 CH 7 Foreign Currency Derivatives: Futures and Options

16) A call option on euros is written with a strike price of $1.30/euro. Which spot price maximizes your profit if you choose to exercise the option before maturity? A) $1.20/euro B) $1.25/euro C) $1.30/euro D) $1.35/euro

D) $1.35/euro

1) Financial derivatives are powerful tools that can be used by management for purposes of: A) speculation. B) hedging. C) human resource management. D) A and B above

D) A and B above

3) Which of the following is NOT a contract specification for currency futures trading on an organized exchange? A) size of the contract B) maturity date C) last trading day D) All of the above are specified.

D) All of the above are specified

18) Jasper Pernik is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ and the 6-month forward rate is ¥128.53/$. Jasper would earn a higher rate of return by buying yen and selling a forward contract than if he had invested her money in 6-month US Treasury securities at an annual rate of 2.50%.

False

27) Most option profits and losses are realized through taking actual delivery of the currency rather than offsetting contracts.

False

16) Currency futures contracts have become standard fare and trade readily in the world money centers.

True

17) The major difference between currency futures and forward contracts is that futures contracts are standardized for ease of trading on an exchange market whereas forward contracts are specialized and tailored to meet the needs of clients.

True

25) The writer of the option is referred to as the seller, and the buyer of the option is referred to as the holder.

True

26) Foreign currency options are available both over-the-counter and on organized exchanges.

True

22) Which of the following is NOT true for the writer of a put option? A) The maximum loss is limited to the strike price of the underlying asset less the premium. B) The gain or loss is equal to but of the opposite sign of the buyer of a put option. C) The maximum gain is the amount of the premium. D) All of the above are true.

D) All of the above are true

9) Jack Hemmings bought a 3-month British pound futures contract for $1.4400/£ only to see the dollar appreciate to a value of $1.4250 at which time he sold the pound futures. If each pound futures contract is for an amount of £62,500, how much money did Jack gain or lose from his speculation with pound futures? A) $937.50 loss B) $937.50 gain C) £937.50 loss D) £937.50 gain

A) $937.50 loss

8) Peter Simpson thinks that the U.K. pound will cost $1.43/£ in six months. A 6-month currency futures contract is available today at a rate of $1.44/£. If Peter was to speculate in the currency futures market, and his expectations are correct, which of the following strategies would earn him a profit? A) Sell a pound currency futures contract. B) Buy a pound currency futures contract. C) Sell pounds today. D) Sell pounds in six months.

A) Sell a pound currency futures contract

12) Jasper Pernik is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ and the 6-month forward rate is ¥128.53/$. Jasper thinks the yen will move to ¥128.00/$ in the next six months. Jasper should ________ at ________ to profit from changing currency values. A) buy yen; the forward rate B) buy dollars; the forward rate C) sell yen; the forward rate D) There is not enough information to answer this question.

A) buy yen; the forward rate

2) A foreign currency ________ option gives the holder the right to ________ a foreign currency, whereas a foreign currency ________ option gives the holder the right to ________ an option. A) call, buy, put, sell B) call, sell, put, buy C) put, hold, call, release D) none of the above

A) call, buy, put, sell

2) A foreign currency ________ contract calls for the future delivery of a standard amount of foreign exchange at a fixed time, place, and price. A) futures B) forward C) option D) swap

A) futures

7) A call option whose exercise price is less than the spot price is said to be: A) in-the-money. B) at-the-money. C) out-of-the-money. D) under-the-spot.

A) in-the-money

19) The maximum gain for the purchaser of a call option contract is ________ while the maximum loss is ________. A) unlimited; the premium paid. B) the premium paid; unlimited. C) unlimited; unlimited. D) unlimited; the value of the underlying asset.

A) unlimited; the premium paid

24) The value of a European style call option is the sum of two components: A) the present value plus the intrinsic value. B) the time value plus the present value. C) the intrinsic value plus the time value. D) the intrinsic value plus the standard deviation.

C) the intrinsic value plus the time value

17) A call option on UK pounds has a strike price of $2.05/£ and a cost of $0.02. What is the break-even price for the option? A) $2.03/£ B) $2.07/£ C) $2.05/£ D) The answer depends upon if this is a long or a short call option.

B) $2.07/£

4) About ________ of all futures contracts are settled by physical delivery of foreign exchange between buyer and seller. A) 0% B) 5% C) 50% D) 95%

B) 5%

8) An option whose exercise price is equal to the spot rate is said to be: A) in-the-money. B) at-the-money. C) out-of-the-money. D) on-the-spot.

B) at-the-money

15) Jasper Pernik is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ and the 6-month forward rate is ¥128.53/$. Jasper thinks the yen will move to ¥128.00/$ in the next six months. If Jasper's expectations are correct, then he could profit in the forward market by ________ and then ________. A) buying yen for ¥128.00/$; selling yen at ¥128.53/$ B) buying yen for ¥128.53/$; selling yen at ¥128.00/$ C) There is not enough information to answer this question. D) He could not profit in the forward market.

B) buying yen for ¥128.53/$; selling yen at ¥128.00/$

10) As a general statement, it is safe to say that businesses generally use the ________ for foreign currency option contracts, and individuals and financial institutions typically use the ________. A) exchange markets; over-the-counter B) over-the-counter; exchange markets C) private; government sponsored D) government sponsored; private

B) over-the-counter; exchange markets

21) Which of the following is NOT true for the writer of a call option? A) The maximum loss is unlimited. B) The maximum gain is unlimited. C) The gain or loss is equal to but of the opposite sign of the buyer of a call option. D) All of the above are true.

B) the maximum gain is unlimited

13) Jasper Pernik is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ and the 6-month forward rate is ¥128.53/$. Jasper thinks the yen will move to ¥128.00/$ in the next six months. If Jasper buys $100,000 worth of yen at today's spot price and sells within the next six months at ¥128/$, he will earn a profit of: A) $146.09. B) $101,460.94. C) $1460.94. D) nothing; he will lose money

C) $1460.94

14) Dash Brevenshure works for the currency trading unit of ING Bank in London. He speculates that in the coming months the dollar will rise sharply vs. the pound. What should Dash do to act on his speculation? A) Buy a call on the pound. B) Sell a call on the pound. C) Buy a put on the pound. D) Sell a put on the pound.

C) Buy a put on the pound

3) The price at which an option can be exercised is called the: A) premium. B) spot rate. C) strike price. D) commission.

C) Strike price

18) Your U.S firm has an accounts payable denominated in UK pounds due in 6 months. To protect yourself against unexpected changes in the dollar/pound exchange rate you should: A) buy a pound put option. B) sell a pound put option. C) buy a pound call option. D) sell a pound call option.

C) buy a pound call option

6) A speculator in the futures market wishing to lock in a price at which they could ________ a foreign currency will ________ a futures contract. A) buy; sell B) sell; buy C) buy; buy D) none of the above

C) buy; buy

5) Futures contracts require that the purchaser deposit an initial sum as collateral. This deposit is called a: A) collateralized deposit. B) marked market sum. C) margin. D) settlement.

C) margin

1) A foreign currency ________ gives the purchaser the right, not the obligation, to buy a given amount of foreign exchange at a fixed price per unit for a specified period. A) future B) forward C) option D) swap

C) option

6) A call option whose exercise price exceeds the spot price is said to be: A) in-the-money. B) at-the-money. C) out-of-the-money. D) over-the-spot.

C) out-of-the-money

7) A speculator that has ________ a futures contract has taken a ________ position. A) sold; long B) purchased; short C) sold; short D) purchased; sold

C) sold; short

10) Which of the following statements regarding currency futures contracts and forward contracts is NOT true? A) A futures contract is a standardized amount per currency whereas the forward contact is for any size desired. B) A futures contract is for a fixed maturity whereas the forward contract is for any maturity you like up to one year. C) Futures contracts trade on organized exchanges whereas forwards take place between individuals and banks with other banks via telecom linkages. D) All of the above are true.

D) All of the above are true

11) Which of the following is NOT a difference between a currency futures contract and a forward contract? A) The futures contract is marked to market daily, whereas the forward contract is only due to be settled at maturity. B) The counterparty to the futures participant is unknown with the clearinghouse stepping into each transaction, whereas the forward contract participants are in direct contact setting the forward specifications. C) A single sales commission covers both the purchase and sale of a futures contract, whereas there is no specific sales commission with a forward contract because banks earn a profit through the bid-ask spread. D) All of the above are true.

D) All of the above are true

4) An ________ option can be exercised only on its expiration date, whereas a/an ________ option can be exercised anytime between the date of writing up to and including the exercise date. A) American; European B) American; British C) Asian; American D) European; American

D) European; American

20) The buyer of a long call option: A) has a maximum loss equal to the premium paid. B) has a gain equal to but opposite in sign to the writer of the option. C) has an unlimited maximum gain potential. D) all of the above

D) all of the above

23) The buyer (long) of a put option: A) has a maximum loss equal to the premium paid. B) has a gain equal to but opposite in sign to the writer of the option. C) has maximum gain potential limited to the difference between the strike price and the premium paid. D) all of the above

D) all of the above

9) The main advantage(s) of over-the-counter foreign currency options over exchange traded options is (are): A) expiration dates tailored to the needs of the client. B) amounts that are tailor made. C) client desired expiration dates. D) all of the above

D) all of the above

14) Jasper Pernik is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ and the 6-month forward rate is ¥128.53/$. Jasper thinks the yen will move to ¥128.00/$ in the next six months. If Jasper buys $100,000 worth of yen at today's spot price her potential gain is ________ and her potential loss is ________. A) $100,000; unlimited B) unlimited; unlimited C) $100,000; $100,000 D) unlimited; $100,000

D) unlimited; $100,000

15) A put option on yen is written with a strike price of ¥105.00/$. Which spot price maximizes your profit if you choose to exercise the option before maturity? A) ¥100/$ B) ¥105/$ C) ¥110/$ D) ¥115/$

D) ¥115/$