FINA SUM EXAM 2
C) have original maturities of 3, 6, 9, and 12 months.
Most exchange traded currency options A)mature every month, with daily resettlement. B)have original maturities of 1, 2, and 3 years. C)have original maturities of 3, 6, 9, and 12 months. D)mature every month, without daily resettlement.
B) Economic exposure
)__________ type of exposure is defined as the extent to which the value of the firm would be affected by unanticipated changes in exchange rates A) Exchange rate exposure B) Economic exposure C) Translation exposure D) none of the options
A) the sensitivity of realized domestic currency values of the firm's contractual cash flows denominated in foreign currencies to unexpected exchange rate changes.
1)Transaction exposure is defined as A) the sensitivity of realized domestic currency values of the firm's contractual cash flows denominated in foreign currencies to unexpected exchange rate changes. B) the extent to which the value of the firm would be affected by unanticipated changes in exchange rate. C) the potential that the firm's consolidated financial statement can be affected by changes in exchange rates. D) ex post and ex ante currency exposures.
B) translation exposure.
A CFO should be least worried about A) transaction exposure. B) translation exposure. C) economic exposure. D) none of the options
B)is an example of a futures contract.
A CME contract on €125,000 with September delivery A)is an example of a forward contract. B)is an example of a futures contract. C)is an example of a put option. D)is an example of a call option.
B) European options can only be exercised at maturity; American options can be exercised prior to maturity.
A European option is different from an American option in that A)one is traded in Europe and one in traded in the United States. B)European options can only be exercised at maturity; American options can be exercised prior to maturity. C)European options tend to be worth more than American options, ceteris paribus. D)American options have a fixed exercise price; European options' exercise price is set at the average price of the underlying asset during the life of the option
C) the firm will realize $1,640,000 on the sale net of the cost of hedging
A U.S. firm has sold an Italian firm €1,000,000 worth of product. In one year the U.S. firm gets paid. To hedge, the U.S. firm bought put options on the euro with a strike price of $1.65. They paid an option premium $0.01 per euro. Assume the one-year dollar interest rate is 6.1% and at maturity, the exchange rate is $1.60, A) the firm will realize $1,145,000 on the sale net of the cost of hedging. B) the firm will realize $1,150,000 on the sale net of the cost of hedging. C) the firm will realize $1,640,000 on the sale net of the cost of hedging. D) none of the options
A) C0 = [qCuT + (1 − q)CdT] / (1 + i$)
A binomial call option premium is calculated as A) C0 = [qCuT + (1 − q)CdT] / (1 + i$) B) C0 = [qCdT + (1 − q)CuT] / (1 + i$) C) C0 = [qCuT + (1 − q)CdT] / (1− i$) D) C0 = [qCdT + (1 − q)CuT] / (1 − i$)
D) all of the options
A currency futures option amounts to a derivative on a derivative. Why would something like that exist? A)For some assets, the futures contract can have lower transaction costs and greater liquidity than the underlying asset. B)Tax consequences matter as well, and for some users an option contract on a future is more tax efficient. C)Transaction costs and liquidity D)all of the options
)daily price limit
A limit as to how much the settlement price an increase or decrease from the previous day's settlement describes a? A)commission B)clearinghouse C)daily price limit D)none of the options
true
A put option on $15,000 with a strike price of €0.666/$ is the same thing as a call option on €10,000 with a strike price of $1.50/€.
A) anticipated changes in exchange rates that have been already discounted and reflected in the firm's value.
A stock market investor would pay attention to A) anticipated changes in exchange rates that have been already discounted and reflected in the firm's value. B) unanticipated changes in exchange rates that have not been discounted and reflected in the firm's value. C) anticipated changes in exchange rates that have been already discounted and reflected in the firm's value, as well as unanticipated changes in exchange rates that have not been discounted and reflected in the firm's value. D) none of the options
A) should be at least as large as their intrinsic value
American call and put premiums A)should be at least as large as their intrinsic value. B)should be no larger than their intrinsic value. C)should be exactly equal to their time value. D)should be no larger than their speculative value.
B) a contract giving the owner (buyer) of the option the right, but not the obligation, to buy (call) or sell (put) a given quantity of an asset at a specified price at some time in the future.
An "option" is A)a contract giving the seller (writer) of the option the right, but not the obligation, to buy (call) or sell (put) a given quantity of an asset at a specified price at some time in the future. B)a contract giving the owner (buyer) of the option the right, but not the obligation, to buy (call) or sell (put) a given quantity of an asset at a specified price at some time in the future. C)a contract giving the owner (buyer) of the option the right, but not the obligation, to buy (put) or sell (call) a given quantity of an asset at a specified price at some time in the future. D)a contract giving the owner (buyer) of the option the right, but not the obligation, to buy (put) or sell (sell) a given quantity of an asset at a specified price at some time in the future.
C) (i), (iv), and (v)
An investor believes that the price of a stock, say IBM's shares, will increase in the next 60 days. If the investor is correct, which combination of the following investment strategies will show a profit in all the choices? 1. (i) buy the stock and hold it for 60 days 2. (ii) buy a put option 3. (iii) sell (write) a call option 4. (iv) buy a call option 5. (v) sell (write) a put option A)(i), (ii), and (iii) B)(i), (ii), and (iv) C)(i), (iv), and (v) D)(ii) and (iii)
C) 3.55 cents
Assume that the dollar-euro spot rate is $1.28 and the six-month forward rate isThe six-month U.S. dollar rate is 5 percent and the Eurodollar rate is 4 percent. The minimum price that a six-month American call option with a striking price of $1.25 should sell for in a rational market is A)0 cents. B)3.47 cents. C)3.55 cents. D)3 cents.
D) all of the options
Buying a currency option provides A) a flexible hedge against exchange exposure. B) limits the downside risk while preserving the upside potential. C) a right, but not an obligation, to buy or sell a currency. D) all of the options
D)delivery of the underlying asset is seldom made in futures contracts and delivery of the underlying asset is usually made in forward contracts
Comparing "forward" and "futures" exchange contracts, we can say that A)delivery of the underlying asset is seldom made in futures and forward contracts. B)delivery of the underlying asset is usually made in futures and forward contracts. C)delivery of the underlying asset is never made in either contract—they are typically cash settled at maturity. D)delivery of the underlying asset is seldom made in futures contracts and delivery of the underlying asset is usually made in forward contracts.
D)their major difference is in the way the underlying asset is priced for future purchase or sale: futures settle daily and forwards settle at maturity, and a futures contract is traded on an organized exchange, while a forward contract is tailor-made by an international bank for its clients and is traded OTC
Comparing "forward" and "futures" exchange contracts, we can say that A)they are both "marked-to-market" daily. B)their major difference is in the way the underlying asset is priced for future purchase or sale: futures settle daily and forwards settle at maturity. C)a futures contract is traded on an organized exchange, while forward contract is tailor-made by an international bank for its clients and is traded OTC. D)their major difference is in the way the underlying asset is priced for future purchase or sale: futures settle daily and forwards settle at maturity, and a futures contract is traded on an organized exchange, while a forward contract is tailor-made by an international bank for its clients and is traded OTC
D) all of the options
Empirical tests of the Black-Scholes option pricing formula A) have faced difficulties due to nonsynchronous data. B) suggest that when using simultaneous price data and incorporating transaction costs they conclude that the PHLX American currency options are efficiently priced. C) suggest that the European option-pricing model works well for pricing American currency options that are at- or out-of-the money, but does not do well in pricing in-the-money calls and puts. D) all of the options
A) Borrow €970,873.79 in one year you owe €1m, which will be financed with the receivable. Convert €970,873.79 to dollars at spot, receive $1,165,048.54. Convert dollars to pounds at spot, receive £728,155.34.
Detail a strategy using spot exchange rates and borrowing or lending that will hedge your exchange rate risk. A) Borrow €970,873.79 in one year you owe €1m, which will be financed with the receivable. Convert €970,873.79 to dollars at spot, receive $1,165,048.54. Convert dollars to pounds at spot, receive £728,155.34. B) Sell €1m forward using 16 contracts at $1.20 per €1. Buy £750,000 forward using 12 contracts at $1.60 per £1. C) Sell €1m forward using 16 contracts at the forward rate of $1.29 per €1. Buy £750,000 forward using 12 contracts at the forward rate of $1.72 per £1. D) none of the options
D) works well for pricing American currency options that are at-the-money or out-of-the-money, but does not do well in pricing in-the-money calls and puts.
Empirical tests of the Black-Scholes option pricing formula A) shows that binomial option pricing is used widely in practice, especially by international banks in trading OTC options. B) works poorly for pricing American currency options that are at-the-money. C) work well for pricing in-the-money calls and puts. D) works well for pricing American currency options that are at-the-money or out-of-the-money, but does not do well in pricing in-the-money calls and puts.
A) transaction exposure
Exchange rate risk of a foreign currency payable is an example of A) transaction exposure. B) translation exposure. C) economic exposure. D) none of the options
A) a long futures position for the call buyer or put writer
Exercise of a currency futures option results in A)a long futures position for the call buyer or put writer. B)a short futures position for the call buyer or put writer. C)a long futures position for the put buyer or call writer. D)a short futures position for the call buyer or put buyer.
A) Ce = $0.0400
Find the Black-Scholes price of a six-month call option written on €100,000 with a strike price of $1.25 = €1.00. The current exchange rate is $1.25 = €1.00. The U.S. risk-free rate is 5 percent over the period and the euro-zone risk-free rate is 4 percent. The volatility of the underlying asset is 10.7 percent. A) Ce = $0.0400 B) Ce = $0.0998 C) Ce = $1.6331 D) none of the options
A) $3,308.82
Find the dollar value today of a 1-period at-the-money call option on €10,000. The spot exchange rate is €1.00 = $1.25. In the next period, the euro can increase in dollar value to $2.00 or fall to $1.00. The interest rate in dollars is i$ = 27.50%; the interest rate in euro is i€ = 2%. A)$3,308.82B)$0C)$3,294.12D)$4,218.75
B) 8/13
Find the hedge ratio for a call option on £10,000 with a strike price of €12,500. The current exchange rate is €1.50/£1.00 and in the next period the exchange rate can increase to €2.40/£ or decrease to €0.9375/€1.00 (i.e. u = 1.6 and d = 1/u = 0.625). The current interest rates are i€ = 3% and are i£ = 4%. Choose the answer closest to your A) 5/9 B) 8/13 C) 2/3 D) 3/8 E) none of the options
A) d1 = 0.074246
Find the input d1 of the Black-Scholes price of a six-month call option on Japanese yen. The strike price is $1 = ¥100. The current spot rate is $1 = ¥100. The volatility is 25 percent per annum; i$ = 5.5% and i¥ = 6%. A) d1 = 0.074246 B) d1 = 0.005982 C) d1 = $0.006137/¥ D) none of the options
A) d1 = 0.1039
Find the input d1 of the Black-Scholes price of a six-month call option written on €100,000 with a strike price of $1.25 = €1.00. The current exchange rate is $1.25 = €1.00. The U.S. risk-free rate is 5% over the period and the euro-zone risk-free rate is 4%. The volatility of the underlying asset is 10.7 percent. A) d1 = 0.1039 B) d1 = 2.9871 C) d1 = 0.0283
A) $9.5238
Find the value of a call option written on €100 with a strike price of $1.00 = €1.00. In one period, there are two possibilities: the exchange rate will move up by 15 percent or down by 15 percent (i.e. $1.15 = €1.00 or $0.85 = €1.00). The U.S. risk-free rate is 5 percent over the period. The risk-neutral probability of dollar depreciation is 2/3 and the risk-neutral probability of the dollar strengthening is 1/3. {MISSING IMGE A) $9.5238 B) $0.0952 C) $0 D) $3.1746
C) Decrease the value of calls, increase the value of puts ceteris paribus
For European currency options written on euro with a strike price in dollars, what is the effect of an increase in r$ relative to r€? A)Decrease the value of calls and puts ceteris paribus B)Increase the value of calls and puts ceteris paribus C)Decrease the value of calls, increase the value of puts ceteris paribus D)Increase the value of calls, decrease the value of puts ceteris paribus
D) Increase the value of calls, decrease the value of puts ceteris paribus
For European currency options written on euro with a strike price in dollars, what is the effect of an increase in r$? A)Decrease the value of calls and puts ceteris paribus B) Increase the value of calls and puts ceteris paribus C) Decrease the value of calls, increase the value of puts ceteris paribus D) Increase the value of calls, decrease the value of puts ceteris paribus
C) Decrease the value of calls, increase the value of puts ceteris paribus
For European currency options written on euro with a strike price in dollars, what is the effect of an increase in r€? A) Decrease the value of calls and puts ceteris paribus B) Increase the value of calls and puts ceteris paribus C) Decrease the value of calls, increase the value of puts ceteris paribus D) Increase the value of calls, decrease the value of puts ceteris paribus
D) Increases the value of calls, decreases the value of puts ceteris paribus
For European currency options written on euro with a strike price in dollars, what is the effect of an increase in the exchange rate S($/€)? A) Decreases the value of calls and puts ceteris paribus B) Increases the value of calls and puts ceteris paribus C) Decreases the value of calls, increases the value of puts ceteris paribus D) Increases the value of calls, decreases the value of puts ceteris paribus
D) Increases the value of calls, decreases the value of puts ceteris paribus
For European currency options written on euro with a strike price in dollars, what is the effect of an increase in the exchange rate S(€/$)? A) Decreases the value of calls and puts ceteris paribus B) Increases the value of calls and puts ceteris paribus C) Decreases the value of calls, increases the value of puts ceteris paribus D) Increases the value of calls, decreases the value of puts ceteris paribus
D) Increase the value of calls, decrease the value of puts ceteris paribus
For European options, what is the effect of an increase in St? A)Decrease the value of calls and puts ceteris paribus B)Increase the value of calls and puts ceteris paribus C)Decrease the value of calls, increase the value of puts ceteris paribus D)Increase the value of calls, decrease the value of puts ceteris paribus
B) intrinsic value and time value.
For European options, what is the effect of an increase in the strike price E? A)Decrease the value of calls and puts ceteris paribus B)Increase the value of calls and puts ceteris paribus C)Decrease the value of calls, increase the value of puts ceteris paribus D)Increase the value of calls, decrease the value of puts ceteris paribus
B) credit risk considerations are more germane for a receivable.
From the perspective of a corporate CFO, when hedging a payable versus a receivable A) credit risk considerations are more germane for a payable. B) credit risk considerations are more germane for a receivable. C) none of the options
A) $1.52/€
From the perspective of the writer of a put option written on €62,500. If the strike price is $1.55/€, and the option premium is $1,875, at what exchange rate do you start to lose money? A)$1.52/€ B)$1.55/€ C)$1.58/€ D)none of the options
D) going long in the futures contract, borrowing in the foreign currency, and going long in the domestic currency, investing the proceeds at the local rate of interest.
If a currency futures contract (direct quote) is priced below the price implied by Interest Rate Parity (IRP), arbitrageurs could take advantage of the mispricing by simultaneously A)going short in the futures contract, borrowing in the domestic currency, and going long in the foreign currency in the spot market. B)going short in the futures contract, lending in the domestic currency, and going long in the foreign currency in the spot market. C)going long in the futures contract, borrowing in the domestic currency, and going short in the foreign currency in the spot market. D)going long in the futures contract, borrowing in the foreign currency, and going long in the domestic currency, investing the proceeds at the local rate of interest.
B) a short position in a currency forward contract.
If you have a long position in a foreign currency, you can hedge with A) a short position in an exchange-traded futures option. B) a short position in a currency forward contract. C) a short position in foreign currency warrants. D) borrowing (not lending) in the domestic and foreign money markets.
D) a long position in a currency forward contract, or buying the foreign currency today and investing it in the foreign county
If you owe a foreign currency denominated debt, you can hedge with A) a short position in a currency forward contract. B) a short position in an exchange-traded futures option. C) buying the foreign currency today and investing it in the foreign county. D) a long position in a currency forward contract, or buying the foreign currency today and investing it in the foreign county
D) a swap contract where pay the cash flows of the bond in exchange for dollars.
If you own a foreign currency denominated bond, you can hedge with A) a long position in a currency forward contract. B) a long position in an exchange-traded futures option. C) buying the foreign currency today and investing it in the foreign county. D) a swap contract where pay the cash flows of the bond in exchange for dollars.
C) buy call options on the euro.
If you think that the dollar is going to depreciate against the euro, you should A)buy put options on the euro. B)sell call options on the euro. C)buy call options on the euro. D)none of the options
A)attempts to profit from a change in the futures price.
In reference to the futures market, a "speculator" A)attempts to profit from a change in the futures price. B)wants to avoid price variation by locking in a purchase price of the underlying asset through a long position in the futures contract or a sales price through a short position in the futures contract. C)stands ready to buy or sell contracts in unlimited quantity. D)wants to avoid price variation by locking in a purchase price of the underlying asset through a long position in the futures contract or a sales price through a short position in the futures contract, and also stands ready to buy or sell contracts in unlimited quantity.
D)the clearing member stands in for the defaulting party and will seek restitution for the defaulting party.
In the event of a default on one side of a futures trade, A)the clearing member stands in for the defaulting party. B)the clearing member will seek restitution for the defaulting party. C)if the default is on the short side, a randomly selected long contract will not get paid. That party will then have standing to initiate a civil suit against the defaulting short. D)the clearing member stands in for the defaulting party and will seek restitution for the defaulting party.
A) Futures
In which market does a clearinghouse serve as a third party to all transactions? A)Futures B)Forwards C)Swaps D)none of the options
D) tends to be greatest for the near-term contracts, and typically decreases with the term to maturity of most futures contracts.
Open interest in currency futures contracts A)tends to be greatest for the near-term contracts, and typically increases with the term to maturity of most futures contracts. B)tends to be greatest for the longer-term contracts. C)typically increases with the term to maturity of most futures contracts. D)tends to be greatest for the near-term contracts, and typically decreases with the term to maturity of most futures contracts
A) $159.22
Suppose you observe the following one-year interest rates, spot exchange rates and futures prices. Futures contracts are available on €10,000. How much risk-free arbitrage profit could you make on one contract at maturity from this mispricing? Exchange Rate Interest Rate APR S0($/€) $1.45 = €1.00 i$ 4% F360($/€) $1.48 = €1.00 i€ 3% A)$159.22 B)$153.10 C)$439.42 D)none of the options
C) the corporation's banker would benefit from the risk reduction that hedging offers.
Since a corporation can hedge exchange rate exposure at low cost A) there is no benefit to the shareholders in an efficient market. B) shareholders would benefit from the risk reduction that hedging offers. C) the corporation's banker would benefit from the risk reduction that hedging offers. D) none of the options
D) Both B and C are correct.
Suppose that you have written a call option on €10,000 with a strike price in dollars. Suppose further that the hedge ratio is 1/2. Which of the following would be an appropriate hedge for a short position in this call option? A) Buy €5,000 today at today's spot exchange rate. B) Agree to buy €5,000 at the maturity of the option at the forward exchange rate for the maturity of the option that prevails today (i.e., go long in a forward contract on €5,000). C) Buy the present value of €5,000 discounted at i€ for the maturity of the option. D) Both B and C are correct.
A)Go long in the futures contract.
Suppose the futures price is below the price predicted by IRP. What steps would a speculator take to attempt to profit? A)Go long in the futures contract. B)Go short in the futures contract. C)Go short in the spot market. D)Go long in the spot market.
D)the total number of long or short contracts outstanding for the particular delivery month.
The "open interest" shown in currency futures quotations is A)the total number of people indicating interest in buying the contracts in the near future. B)the total number of people indicating interest in selling the contracts in the near future. C)the total number of people indicating interest in buying or selling the contracts in the near future. D)the total number of long or short contracts outstanding for the particular delivery month.
A) is used widely in practice, especially by international banks in trading OTC options.
The Black-Scholes option pricing formula A) is used widely in practice, especially by international banks in trading OTC options. B) is not widely used outside of the academic world. C) works well enough, but is not used in the real world because no one has the time to flog their calculator for five minutes on the trading floor. D) none of the options
D) $3,125
The current spot exchange rate is $1.55 = €1.00 and the three-month forward rate is $1.60 = €1.00. Consider a three-month American call option on €62,500 with a strike price of $1.50 = €1.00. Immediate exercise of this option will generate a profit of A)$6,125. B)$6,125/(1 + i$)3/12. C)negative profit, so exercise would not occur. D)$3,125.
B) $1.55 = €1.00.
The current spot exchange rate is $1.55 = €1.00 and the three-month forward rate is $1.60 = €1.00. Consider a three-month American call option on €62,500. For this option to be considered at-the-money, the strike price must be A)$1.60 = €1.00. B)$1.55 = €1.00. C)$1.55 × (1 + i$)3/12 = €1.00 × (1 + i€)3/12. D)none of the options
A) interest rate parity.
The choice between a forward market hedge and a money market hedge often comes down to A) interest rate parity. B) option pricing. C) flexibility and availability. D) none of the options
A) $1.58 = €1.00
The current spot exchange rate is $1.55 = €1.00 and the three-month forward rate is $1.60 = €1.00. Consider a three-month American call option on €62,500 with a strike price of $1.50 = €1.00. If you pay an option premium of $5,000 to buy this call, at what exchange rate will you break-even? A)$1.58 = €1.00 B)$1.62 = €1.00 C)$1.50 = €1.00 D)$1.68 = €1.00
A)$0.05 × 62,500 = $3,125
The current spot exchange rate is $1.55 = €1.00; the three-month U.S. dollar interest rate is 2 percent. Consider a three-month American call option on €62,500 with a strike price of $1.50 = €1.00. What is the least that this option should sell for? A)$0.05 × 62,500 = $3,125 B)$3,125/1.02 = $3,063.73 C)$0.00 D)none of the options
C) Both A and B
The equation for a European Call Option is a function of which variables? A. The exchange rate and the exercise price B. The foreign interest rate and the dollar interest rate A) A B) B C) Both A and B D) Neither A or B
C) economic exposure.
The extent to which the value of the firm would be affected by unexpected changes in the exchange rate is A) transaction exposure. B) translation exposure. C) economic exposure. D) none of the options
D) all of the options
The hedge ratio A) Is the size of the long (short) position the investor must have in the underlying asset per option the investor must write (buy) to have a risk-free offsetting investment that will result in the investor perfectly hedging the option. B){MISSING IMAGE} C) Is related to the number of options that an investor can write without unlimited loss while holding a certain amount of the underlying asset. D) all of the options
B) currency forward contracts.
The most direct and popular way of hedging transaction exposure is by A) exchange-traded futures options. B) currency forward contracts. C) foreign currency warrants. D) borrowing and lending in the domestic and foreign money markets.
C) both 1/d and e^(σt0.5)
The one-step binomial model assumes that at the end of the option period, the call will have appreciated to SuT = S0u or depreciated to SdT = S0d. How is u calculated? A) 1/d B) e^(σt0.5) C) both 1/d and e^(σt0.5) D) none of these options
A) transaction exposure.
The sensitivity of "realized" domestic currency values of the firm's contractual cash flows denominated in foreign currency to unexpected changes in the exchange rate is A) transaction exposure. B) translation exposure. C) economic exposure. D) none of the options
B) translation exposure.
The sensitivity of the firm's consolidated financial statements to unexpected changes in the exchange rate is A) transaction exposure. B) translation exposure. C) economic exposure. D) none of the options
B) much larger than that of organized-exchange currency option trading.
The volume of OTC currency options trading is A)much smaller than that of organized-exchange currency option trading. B)much larger than that of organized-exchange currency option trading. C)larger, because the exchanges are only repackaging OTC options for their customers. D)none of the options
A)Lost $0.04 per € or $2,500
Three days ago, you entered into a futures contract to sell €62,500 at $1.50 per €. Over the past three days the contract has settled at $1.50, $1.52, and $1.54. How much have you made or lost? A)Lost $0.04 per € or $2,500 B)Made $0.04 per € or $2,500 C)Lost $0.06 per € or $3,750 D)none of the options
B) $1,675
Today's settlement price on a Chicago Mercantile Exchange (CME) yen futures contract is $0.8011/¥100. Your margin account currently has a balance of $2,000. The next three days' settlement prices are $0.8057/¥100, $0.7996/¥100, and $0.7985/¥100. (The contractual size of one CME yen contract is ¥12,500,000). If you have a long position in one futures contract, the changes in the margin account from daily marking-to-market, will result in the balance of the margin account after the third day to be A)$1,425. B)$1,675. C)$2,000. D)$3,425
C)$2,325.
Today's settlement price on a Chicago Mercantile Exchange (CME) yen futures contract is $0.8011/¥100. Your margin account currently has a balance of $2,000. The next three days' settlement prices are $0.8057/¥100, $0.7996/¥100, and $0.7985/¥100. (The contractual size of one CME yen contract is ¥12,500,000). If you have a short position in one futures contract, the changes in the margin account from daily marking-to-market will result in the balance of the margin account after the third day to be A)$1,425. B)$2,000. C)$2,325. D)$3,425.
C) $0.0672/100
Use the European option pricing formula to find the value of a six-month call option on Japanese yen. The strike price is $1 = ¥100. The spot rate is $1 = ¥100. The volatility is 25 percent per annum; i$ = 5.5% and i¥ = 6%. A) $0.005395/¥100 B) $0.005982/¥ C) $0.0672/100 D) none of the options
A) €3,275
Use the binomial option pricing model to find the value of a call option on £10,000 with a strike price of €12,500. The current exchange rate is €1.50/£1.00 and in the next period the exchange rate can increase to €2.40/£ or decrease to €0.9375/€1.00 (i.e. u = 1.6 and d = 1/u = 0.625). The current interest rates are i€ = 3% and are i£ = 4%. Choose the answer closest to yours. A)€3,275B)€2,500C)€3,373D)€3,243
A)IRP
What paradigm is used to define the futures price? A)IRP B)Hedge Ratio C)Black Scholes D)Risk Neutral Valuation
B)Traded by bank dealers via a network of telephones and computerized dealing systems
Which of the following does describe a forward contract? A)Traded competitively on organized exchanges. B)Traded by bank dealers via a network of telephones and computerized dealing systems. C)Standardized amount of the underlying asset. D)Standardized deliver dates.
B)Traded by bank dealers via a network of telephones and computerized dealing systems.
Which of the following does not describe a futures contract? A)Traded competitively on organized exchanges. B)Traded by bank dealers via a network of telephones and computerized dealing systems. C)Standardized amount of the underlying asset. D)Standardized deliver dates
B) American options can be exercised early.
Which of the following is correct? A)European options can be exercised early. B)American options can be exercised early. C)Asian options can be exercised early. D)all of the options
D) Option premium = intrinsic value + time value
Which of the following is correct? A)Time value = intrinsic value + option premium B)Intrinsic value = option premium + time value C)Option premium = intrinsic value− time value D)Option premium = intrinsic value + time value
B) The value (in dollars) of a call option on £5,000 with a strike price of $10,000 is equal to the value (in dollars) of a put option on $10,000 with a strike price of £5,000.
Which of the following is correct? A) The value (in dollars) of a call option on £5,000 with a strike price of $10,000 is equal to the value (in dollars) of a put option on $10,000 with a strike price of £5,000 only when the spot exchange rate is $2 = £1. B) The value (in dollars) of a call option on £5,000 with a strike price of $10,000 is equal to the value (in dollars) of a put option on $10,000 with a strike price of £5,000.
D) none of the options
Which of the following is not a type of financial contract? A) Forward contract B) Money market instrument C) Options contract D) none of the options
A) Exchange rate exposure
Which of the following is not a type of foreign currency exposure? A) Exchange rate exposure B) Economic exposure C) Translation exposure D) none of the options
A) Swap strategy
Which of the following is not a type of operational technique? A) Swap strategy B) Choice of the invoice currency C) Lead/lag strategy D) Exposure netting
D) Sell puts and buy calls, as well as buy puts and sell calls.
Which of the following options strategies are internally consistent? A) Sell puts and buy calls. B) Buy puts and sell calls. C) Buy puts and buy calls. D) Sell puts and buy calls, as well as buy puts and sell calls.
C) Buying calls and selling puts
Which of the following options strategies is consistent with its implications about the future behavior of the underlying asset price? A)Selling calls and selling puts B)Buying calls and buying puts C)Buying calls and selling puts D)none of the options
D) all of the options are true
Which of the following statements is true regarding the European option-pricing model? A) was developed by Biger and Hull (1983) B) was developed by Garman, Kohlhage and Grabbe (1983). C) the evolution of the model can be traced back to European option-pricing models developed by Merton (1973) and Black (1976) D) all of the options are true
A) your losses on one side should about equal your gains on the other side.
With any hedge, A) your losses on one side should about equal your gains on the other side. B) you should try to make money on both sides of the transaction; that way you make money coming and going. C) you should spend at least as much time working the hedge as working the underlying deal itself. D) you should agree to anything your banker puts in front of your face.
D) none of the options
With any successful hedge, A) you are guaranteed to lose money on one side. B) you can avoid the accounting ramifications of a loss on one side by keeping it off the books. C) you are guaranteed to lose money on one side, but you can avoid the accounting ramifications of a loss on one side by keeping it off the books. D) none of the options
C) a futures contract on the foreign currency.
With currency futures options the underlying asset is A)foreign currency. B)a call or put option written on foreign currency. C)a futures contract on the foreign currency. D)none of the options
C) futures contracts are characterized by a standardized amount of the underlying asset.
With regard to contractual size, A) forward contracts are characterized by a standardized amount of the underlying asset. B) futures contracts are tailor-made to the needs of the participant. C) futures contracts are characterized by a standardized amount of the underlying asset. D) none of the options
D) futures contracts have standardized delivery dates.
With regard to expiration date, A) futures contracts do not have delivery dates. B) forward contracts have standardized delivery dates. C) futures contracts have tailor-made delivery dates that meet the needs of the investor. D) futures contracts have standardized delivery dates.
B) futures contracts involve the bid-ask spread plus the broker's commission.
With regard to trading costs, A) forward contracts involve the bid-ask spread plus the broker's commission. B) futures contracts involve the bid-ask spread plus the broker's commission. C) futures contracts involve the bid-ask spread plus indirect bank charges via compensating balance requirements. D) none of the options
B) futures contracts are traded competitively on organized exchanges.
With regard to trading location, A) forward contracts are traded competitively on organized exchanges. B) futures contracts are traded competitively on organized exchanges. C) futures contracts are traded by bank dealers via a network of telephones and computerized dealing systems. D) none of the options
C) $6,653,833.
XYZ Corporation, located in the United States, has an accounts payable obligation of ¥750 million payable in one year to a bank in Tokyo. The current spot rate is ¥116/$1.00 and the one year forward rate is ¥109/$1.00. The annual interest rate is 3 percent in Japan and 6 percent in the United States. XYZ can also buy a one-year call option on yen at the strike price of $0.0086 per yen for a premium of 0.012 cent per yen. The future dollar cost of meeting this obligation using the money market hedge is A) $6,450,000. B) $6,545,400. C) $6,653,833. D) $6,880,734.
A) Buy the ¥750 million at the forward exchange rate.
XYZ Corporation, located in the United States, has an accounts payable obligation of ¥750 million payable in one year to a bank in Tokyo. Which of the following is not part of a money market hedge? A) Buy the ¥750 million at the forward exchange rate. B) Find the present value of ¥750 million at the Japanese interest rate. C) Buy that much yen at the spot exchange rate.
C)You have lost $2,500.00.
Yesterday, you entered into a futures contract to buy €62,500 at $1.50 per €. Suppose the futures price closes today at $1.46. How much have you made/lost? A)Depends on your margin balance. B)You have made $2,500.00. C)You have lost $2,500.00. D)You have neither made nor lost money, yet
D)$1.4840 per €.
Yesterday, you entered into a futures contract to buy €62,500 at $1.50 per €. Your initial performance bond is $1,500 and your maintenance level is $500. At what settle price will you get a demand for additional funds to be posted? A)$1.5160 per €. B)$1.208 per €. C)$1.1920 per €. D)$1.4840 per €.
A)$1.4720/€
Yesterday, you entered into a futures contract to buy €62,500 at $1.50/€. Your initial margin was $3,750 (= 0.04 × €62,500 × $1.50/€ = 4 percent of the contract value in dollars). Your maintenance margin is $2,000 (meaning that your broker leaves you alone until your account balance falls to $2,000). At what settle price (use 4 decimal places) do you get a margin call? A)$1.4720/€ B)$1.5280/€ C)$1.500/€ D)none of the options
A)$1.8033 per €.
Yesterday, you entered into a futures contract to sell €75,000 at $1.79 per €. Your initial performance bond is $1,500 and your maintenance level is $500. At what settle price will you get a demand for additional funds to be posted? A)$1.8033 per €. B)$1.2084 per €. C)$1.6676 per €. D)$1.1840 per €.
D) Lending the present value of £6,666.67 today at i£ = 2% or entering into a long position in a futures contract on £6,666.67 would both work
You have written a call option on £10,000 with a strike price of $20,000. The current exchange rate is $2.00/£1.00 and in the next period the exchange rate can increase to $4.00/£1.00 or decrease to $1.00/€1.00 (i.e. u = 2 and d = 1/u = 0. 5). The current interest rates are i$ = 3% and are i£ = 2%. Find the hedge ratio and use it to create a position in the underlying asset that will hedge your option position. A)Enter into a short position in a futures contract on £6,666.67B)Lend the present value of £6,666.67 today at i£ = 2%C)Enter into a long position in a futures contract on £6,666.67D)Lending the present value of £6,666.67 today at i£ = 2% or entering into a long position in a futures contract on £6,666.67 would both work.
D) none of the options
Your firm has a British customer that is willing to place a $1 million order (with payment due in 6 months), but insists upon paying in pounds instead of dollars. A) The customer essentially wants you to discount your price by the value of a put option on pounds. B) The customer essentially wants you to discount your price by the value of a call option on pounds. C) The customer essentially wants you to discount your price by the sum of the values of a call and put option on pounds. D) none of the options
C) $1.90 = £1.00
Your firm has a British customer that is willing to place a $1 million order, but wants to pay in pounds instead of dollars. The spot exchange rate is $1.85 = £1.00 and the one-year forward rate is $1.90 = £1.00. The lead time on the order is such that payment is due in one year. What is the fairest exchange rate to use? A) $1.85 = £1.00 B) $1.8750 = £1.00 C) $1.90 = £1.00 D) none of the options
