FIN 440 - Exam 3

A call option exists on British pounds with an exercise price of $1.60, a 90-day expiration date, and a premium of $0.03 per unit. A put option exists on British pounds with an exercise price of $1.60, a 90-day expiration date, and a premium of $0.02 per unit. You plan to purchase options to cover your future receivables of 700,000 pounds in 90 days. You will exercise the option in 90 days (if at all). You expect the spot rate of the pound to be $1.57 in 90 days. Determine the amount of dollars to be received, after deducting payment for the option premium. - $1,143,100 - $1,169,000 - $1,099,000 - $1,106,000

$1,106,000

The premium on a pound put option is $0.03 per unit. The exercise price is $1.60. The break-even point is ____ for the buyer of the put, and ____ for the seller of the put. (Assume zero transactions costs and that the buyer and seller of the put option are speculators.) - $1.63; $1.57 - $1.57; $1.57 - $1.63; $1.63 - $1.63; $1.60

$1.57; $1.57

Assume the bid rate of a New Zealand dollar is $0.33 while the ask rate is $0.335 at Bank X. Assume the bid rate of the New Zealand dollar is $0.32 while the ask rate is $0.325 at Bank Y. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with? - $15,625 - $31,250 - $22,136 - $15,385

$15,385

Assume that the Mexican peso exhibits a six-month interest rate of 6 percent and that the U.S. dollar exhibits a six-month interest rate of 5 percent. Assume that interest rate parity (IRP) holds. If the peso's spot rate is $0.10, what should the six-month forward rate of the peso be? - $0.094 - $0.099 - $0.955 - $0.991

$0.099

National Bank quotes the following for the British pound and the New Zealand dollar. Value of a British pound (£) in $ is $1.61 (quoted bid price) while value of a British pound (£) in $ is $1.62 (quoted ask price). Value of a New Zealand dollar (NZ$) in $ is $0.55 (quoted bid price) while value of a New Zealand dollar (NZ$) in $ is $0.56 (quoted ask price). The bank also quotes that value of British pound in New Zealand dollar is NZ$2.95 (quoted bid price) while value of British pound in New Zealand dollar is NZ$2.96 (quoted ask price). Assume you have $10,000 to conduct triangular arbitrage. What is your profit from implementing this strategy? - $111.80 - $15.43 - $197.53 - $77.64

$15.43

Assume the bid rate of a Singapore dollar is $0.40 while the ask rate is $0.41 at Bank X. Assume the bid rate of a Singapore dollar is $0.42 while the ask rate is $0.425 at Bank Z. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with? - -$11,964 - $24,390 - $11,764 - $36,585

$24,390

Assume that Smith Corporation will need to purchase 200,000 British pounds in 90 days. A call option exists on British pounds with an exercise price of $1.68, a 90-day expiration date, and a premium of $0.04. A put option exists on British pounds, with an exercise price of $1.69, a 90-day expiration date, and a premium of $0.03. Smith Corporation plans to purchase options to cover its future payables. It will exercise the option in 90 days (if at all). It expects the spot rate of the pound to be $1.76 in 90 days. Determine the amount of dollars it will pay for the payables, including the amount paid for the option premium. - $344,000 - $360,000 - $338,000 - $332,000

$344,000

Use the following information to calculate the dollar cost of using a money market hedge to hedge 200,000 pounds of payables due in 180 days. Assume the firm has no excess cash. Assume the spot rate of the pound is $2.02, the 180-day forward rate is $2.00. The British interest rate is 5%, and the U.S. interest rate is 4% over the 180-day period. - $400,152 - $384,761 - $396,190 - $391,210

$400,152

Hewitt Bank quotes a value for the Japanese yen (¥) of $0.007, and a value for the Canadian Dollar (C$) of $0.821. The cross exchange rate quoted by the bank for the Canadian dollar is ¥118.00. You have $5,000 to conduct triangular arbitrage. How much will you end up with if you conduct triangular arbitrage? Triangular arbitrage is not possible in this case. - $5,030.45 - $6,090.13 - $6,053.27

$5,030.45

Assume you have $900,000 to invest. Current spot rate of the Australian dollar (A$) is $0.62 and 180-day forward rate of the Australian dollar is $0.64. 180-day interest rate in the United States is 3.5% while the 180-day interest rate in Australia is 3%. If you conduct covered interest arbitrage, what is the dollar profit you will have realized after 180 days? - $31,500 - $61,548 - $56,903 - $27,000

$56,903

A firm wants to use an option to hedge 12.5 million in receivables from New Zealand firms. The premium is $0.03. The exercise price is $0.55. If the option is exercised, what is the total amount of dollars received (after accounting for the premium paid)? - $6,500,000 - $7,250,000 - $6,875,000 - $7,000,000

$6,500,000

Money Corp. frequently uses a forward hedge to hedge its Malaysian ringgit (MYR) receivables. For the next month, Money has identified its net exposure to the ringgit as being MYR1,500,000. The 30-day forward rate is $0.23. Furthermore, Money's financial center has indicated that the possible values of the Malaysian ringgit at the end of next month are $0.20 and $0.25, with probabilities of 0.30 and 0.70, respectively. Based on this information, what is the expected real cost of hedging receivables? - $7,500 - -$15,000 - $30,000 - -$45,000

$7,500

A U.S. corporation has purchased currency put options to hedge a 100,000 Canadian dollar (C$) receivable. The premium is $0.01 and the exercise price of the option is $0.75. If the spot rate at the time of maturity is $0.85, what is the net amount received by the corporation if it acts rationally? - $85,000 - $84,000 - $74,000 - $75,000

$84,000

Assume that Parker Company will receive SF200,000 in 360 days. Assume the following interest rates: the 360-day borrowing rate in U.S. is 7% while the 360-day borrowing rate in Switzerland is 5%. The 360-day deposit rate in U.S. is 6% while the 360-day deposit rate in Switzerland is 4%. Assume the forward rate of the Swiss franc is $0.50 and the spot rate of the Swiss franc is $0.48. If Parker Company uses a money market hedge, it will receive ____ in 360 days. - $101,923 - $96,914 - $98,769 - $101,904

$96,914

The greater the variability of a currency, the ____ will be the premium of a call option on this currency, and the ____ will be the premium of a put option on this currency, other things equal. - greater; lower - lower; greater - lower; lower - greater; greater

greater; greater

Assume zero transaction costs. If the 90-day forward rate of the euro is an accurate estimate of the spot rate 90 days from now, then the real cost of hedging payables will be: - zero - positive - negative

zero

When the existing spot rate exceeds the exercise price, a call option is ____, and a put option is ____. - in the money; out of the money - out of the money; out of the money - out of the money; in the money - in the money; in the money

in the money; out of the money

Based on interest rate parity, the larger the degree by which the foreign interest rate exceeds the U.S. interest rate, the: - larger will be the forward discount of the foreign currency. - larger will be the forward premium of the foreign currency. - smaller will be the forward premium of the foreign currency. - smaller will be the forward discount of the foreign currency.

larger will be the forward discount of the foreign currency.

When using ____, funds are not tied up for any length of time. - locational arbitrage and triangular arbitrage - covered interest arbitrage - triangular arbitrage - locational arbitrage

locational arbitrage and triangular arbitrage

From the perspective of Detroit Co., which has payables in Mexican pesos and receivables in Canadian dollars, hedging the payables would be most desirable if the expected real cost of hedging payables is ____, and hedging the receivables would be most desirable if the expected real cost of hedging receivables is ____. - zero; zero - negative; negative - negative; positive - positive; negative

negative; negative

A put option on British pounds has a strike (exercise) price of $1.48. The present exchange rate is $1.55. This put option can be referred to as: - at the money. - out of the money. - in the money

out of the money.

To hedge a ____ in a foreign currency, a firm may ____ a currency futures contract for that currency. - receivable; purchase - payable; sell - payable; purchase

payable; purchase

Assume that interest rate parity (IRP) holds. U.S. interest rate is 13% and British interest rate is 10%. The forward rate on British pounds exhibits a ____ of ____ percent. - discount; 2.73 - discount; 3.65 - premium; 2.73 - premium; 3.65

premium; 2.73

Kalons, Inc. is a U.S.-based MNC that frequently imports raw materials from Canada. Kalons is typically invoiced for these goods in Canadian dollars and is concerned that the Canadian dollar will appreciate in the near future. Which of the following is not an appropriate hedging technique under these circumstances? - purchase Canadian dollar call options - purchase Canadian dollar put options - purchase Canadian dollars forward - purchase Canadian dollar futures contracts

purchase Canadian dollar put options

Which of the following reflects a hedge of net receivables in Australian dollars by a U.S. firm? - purchase a currency put option in Australian dollars. - borrow U.S. dollars, convert them to Australian dollars, and invest them in an Australian dollar deposit. - purchase Australian dollars forward.

purchase a currency put option in Australian dollars.

Which of the following reflects a hedge of net receivables in British pounds by a U.S. firm? - purchase a currency put option in British pounds and sell pounds forward. - borrow U.S. dollars, convert them to pounds, and invest them in a British pound deposit. - purchase a currency put option in British pounds. - sell pounds forward.

purchase a currency put option in British pounds and sell pounds forward.

If Salerno Co. desired to lock in the maximum it would have to pay for its net payables in euros but wanted to be able to capitalize if the euro depreciates substantially against the dollar by the time payment is to be made, the most appropriate hedge would be: - a money market hedge - purchasing euro put options - a forward purchase of euros - purchasing euro call options

purchasing euro call options

If you expect the British pound to appreciate, you could speculate by ____ pound call options or ____ pound put options. - purchasing; purchasing - selling; purchasing - selling; selling - purchasing; selling

purchasing; selling

If you expect the euro to depreciate, it would be appropriate to ____ for speculative purposes. - buy a euro call and buy a euro put - buy a euro call and sell a euro put - sell a euro call and buy a euro put - sell a euro call and sell a euro put

sell a euro call and buy a euro put

Speers Co. has 1,000,000 euros as receivables due in 30 days and is certain that the euro will depreciate substantially over time. Assuming that the firm is correct, the ideal strategy is to: - purchase euros forward. - remain unhedged. - purchase euro currency put options. - purchase euro currency call options. - sell euros forward.

sell euros forward.

Assume that the interest rate in the home country of Currency X is a much higher interest rate than the U.S. interest rate. According to interest rate parity, the forward rate of Currency X: - should be zero (i.e., it should equal its spot rate). - should exhibit a discount. - should exhibit a premium.

should exhibit a discount.

Assume the following bid and ask rates of the pound for two banks as shown below: BidAsk Bank A $1.41 $1.42 Bank B $1.39 $1.40 As locational arbitrage occurs: - the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B will increase. - the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will decrease. - the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will increase. - the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B will decrease.

the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will increase.

To hedge a payable position with a currency option hedge, an MNC would write a call option. - True - False

False

In which case will locational arbitrage most likely be feasible? - One bank's bid price for a currency is less than another bank's bid price for the currency. - One bank's bid price for a currency is greater than another bank's ask price for the currency. - One bank's ask price for a currency is less than another bank's ask price for the currency. - One bank's ask price for a currency is greater than another bank's bid price for the currency.

One bank's bid price for a currency is greater than another bank's ask price for the currency.

If you have bought a right to buy foreign currency, you are: - a call buyer. - a call writer. - a put writer. - a put buyer.

a call buyer.

Current spot rate of the New Zealand dollar (NZ$) is $0.41 and one-year forward rate of the New Zealand dollar is $0.42. Annual interest rate on U.S. dollars is 9% while the annual interest rate on New Zealand dollars is 8%. Given the information in this question, the return from covered interest arbitrage by U.S. investors with $500,000 to invest is ____%. - about 9.63 - about 10.63 - about 11.97 - about 12.12

about 10.63

Which of the following reflects a hedge of net payables on British pounds by a U.S. firm? - sell a currency call option in British pounds. - borrow U.S. dollars, convert them to pounds, and invest them in a British pound deposit. - sell pounds forward. - purchase a currency put option in British pounds.

borrow U.S. dollars, convert them to pounds, and invest them in a British pound deposit.

If interest rate parity (IRP) exists, then ____ is not feasible. - triangular arbitrage - locational arbitrage - locational arbitrage and triangular arbitrage - covered interest arbitrage

covered interest arbitrage

The one-year forward rate of the British pound is quoted at $1.60, and the spot rate of the British pound is quoted at $1.63. The forward ____ is ____ percent. - premium; 1.8 - discount; 1.8 - premium; 1.9 - discount; 1.9

discount; 1.8

You purchase a call option on pounds for a premium of $0.03 per unit, with an exercise price of $1.64; the option will not be exercised until the expiration date, if at all. If the spot rate on the expiration date is $1.65, your net profit per unit is: - -$0.02 - -$0.03 - $0.02 - -$0.01

-$0.02

Assume that a speculator purchases a put option on British pounds (with a strike price of $1.50) for $0.05 per unit. A pound option represents 31,250 units. Assume that at the time of the purchase, the spot rate of the pound is $1.51 and continually rises to $1.62 by the expiration date. The highest net profit possible for the speculator based on the information above is: - -$1,562.50 - -$1,250.00 - -$625.00 - $1,562.50

-$1,562.50

Hanson Corp. frequently uses a forward hedge to hedge its British pound (£) payables. For the next quarter, Hanson has identified its net exposure to the pound as being £1,000,000. The 90-day forward rate is $1.50. Furthermore, Hanson's financial center has indicated that the possible values of the British pound at the end of next quarter are $1.57 and $1.59, with probabilities of 0.50 and 0.50, respectively. Based on this information, what is the expected real cost of hedging payables? - -$90,000 - $1,580,000 - $1,570,000 - -$80,000

-$80,000

Assume the following information for a bank quoting on spot exchange rates: Exchange rate of Singapore dollar in U.S. $ = $0.32 Exchange rate of pound in U.S. $ = $1.50 Exchange rate of pound in Singapore dollars = S$4.5 Based on the information given, as you and others perform triangular arbitrage, what should logically happen to the spot exchange rates? - The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate. - The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should appreciate. - The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate. - The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should depreciate, and the pound value in Singapore dollars should appreciate.

The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should depreciate, and the pound value in Singapore dollars should appreciate.

Which of the following is not true regarding options? - The buyer of a call option has the right to buy the currency at the strike price. - The buyer of a put option has the right to sell the currency at the strike price. - The writer of a call option has the obligation to sell the currency to the buyer if the option if exercised. - The writer of a put option has the obligation to sell the currency to the buyer if the option is exercised.

The writer of a put option has the obligation to sell the currency to the buyer if the option is exercised.

Thornton Corporation is a U.S. firm that invoices some of its exports in Japanese yen. If it expects the yen to weaken, it could sell futures contracts on yen to hedge the exchange rate risk on those exports. - True - False

True