International Finance Chapter 5

Crown Co. is expecting to receive 100,000 British pounds in one year. Crown expects the spot rate of British pound to be $1.49 in a year, so it decides to avoid exchange rate risk by hedging its receivables. The spot rate of the pound is quoted at $1.51. The strike price of put and call options are $1.54 and $1.53 respectively. The premium on both options is $.03. The one-year forward rate exhibits a 2.65% premium. Assume there are no transaction costs. What is the best possible hedging strategy and how many U.S. dollars Crown Co. will receive under this strategy? a. buy a put option and receive $150,000. b. sell pounds forward and receive $155,000. c. sell a call option and receive $156,000. d. sell a put option and receive $157,000.

B

Forward contracts: a. contain a commitment to the owner, and are standardized. b. contain a commitment to the owner, and can be tailored to the desire of the owner. c. contain a right but not a commitment to the owner, and can be tailored to the desire of the owner. d. contain a right but not a commitment to the owner, and are standardized.

B

Frank is an option speculator. He anticipates the Danish kroner to appreciate from its current level of $.19 to $.21. Currently, kroner call options are available with an exercise price of $.18 and a premium of $.02. Should Frank attempt to buy this option? If the future spot rate of the Danish kroner is indeed $.21, what is his profit or loss per unit? a. no; −$0.01. b. yes; $0.01. c. yes; −$0.01. d. yes; $0.03.

B

Graylon, Inc., based in Washington, exports products to a German firm and will receive payment of €200,000 in three months. On June 1, the spot rate of the euro was $1.12, and the 3-month forward rate was $1.10. On June 1, Graylon negotiated a forward contract with a bank to sell €200,000 forward in three months. The spot rate of the euro on September 1 is $1.15. Graylon will receive $____ for the euros. a. 224,000 b. 220,000 c. 200,000 d. 230,000

B

If the observed put option premium is less than what is suggested by the put-call parity equation, astute arbitrageurs could make a profit by ____ the put option, ____ the call option, and ____ the underlying currency. a. selling; buying; buying b. buying; selling; buying c. selling; buying; selling d. buying; buying; buying

B

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

B

If you have bought the right to sell, you are a: a. call writer. b. put buyer. c. futures buyer. d. put writer.

B

In the U.S., the typical currency futures contract is based on a currency value in terms of: a. euros. b. U.S. dollars. c. British pounds. d. Canadian dollars.

B

Johnson, Inc., a U.S.-based MNC, will need 10 million Thai baht on August 1. It is now May 1. Johnson has negotiated a non-deliverable forward contract with its bank. The reference rate is the baht's closing exchange rate (in $) quoted by Thailand's central bank in 90 days. The baht's spot rate today is $.02. If the rate quoted by Thailand's central bank on August 1 is $.022, Johnson will ____ $____. a. pay; 20,000 b. be paid; 20,000 c. pay; 2,000 d. be paid; 2,000 e. none of the above

B

On January 1st, Madison Co. ordered raw material from Japan and agreed to pay 100 million yen for this order on April 1st. It negotiated a 3-month forward contract to obtain 100 million Japanese yen on that date at $.009. On February 1st, the Japanese firm informed Madison Co. that it won't be able to fulfill that order. The Japanese yen spot rate on February 1st is $.0087 and 2-month forward rate exhibits 3% discount. To offset its existing contract Madison Co. will negotiate a forward contract to ____ for the date of April 1st and the profit/loss generated from this transaction is a ____ U.S. dollars. a. sell yen; gain of $60,000 b. sell yen; loss of $60,000 c. buy yen; gain of $30,000 d. to buy yen; loss of $30,000

B

Research has found that the options market is: a. efficient before controlling for transaction costs. b. efficient after controlling for transaction costs. c. highly inefficient. d. none of the above

B

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. a. greater; lower b. greater; greater c. lower; greater d. lower; lower

B

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. a. discount; 1.9 b. discount; 1.8 c. premium; 1.9 d. premium; 1.8

B

The one-year forward rate of the Japanese yen is quoted at $.013, and the spot rate of Japanese yen is quoted at $.011. The forward ____ is ____ percent. a. discount; 18.18 b. premium; 18.18 c. discount; 15.38 d. premium; 15.38

B

The purchase of a currency put option would be appropriate for which of the following? a. Investors who expect to buy a foreign bond in one month. b. Corporations who expect to buy foreign currency to finance foreign subsidiaries. c. Corporations who expect to collect on a foreign account receivable in one month. d. all of the above

B

The spot rate of euro is quoted at $1.29. The annualized forward premium on the euro is 10%. What is the 30-day forward rate of the euro? a. $1.28 b. $1.30 c. $1.42 d. $1.16

B

When a currency call option is classified as "in the money," this indicates that a. the spot rate of the currency is less than the exercise price of the option. b. the spot rate of the currency is greater than the exercise price of the option. c. the buyer of the option would generate a profit; that is, the spot rate would exceed the sum of the exercise price and the premium paid. d. the buyer of the option would generate a profit; that is, the exercise price would exceed the sum of the spot rate and the premium paid.

B

When the futures price on euros is below the forward rate on euros for the same settlement date, astute investors may attempt to simultaneously ____ euros forward and ____ euro futures. a. sell; sell b. buy; sell c. sell; buy d. buy; buy

B

Which of the following are most commonly traded on an exchange? a. forward contracts. b. futures contracts. c. currencies d. none of the above

B

Which of the following does not represent the risk from using forward contracts? a. if a forward contract is used to hedge receivables, and the spot exchange rate at the expiration of contract exceeds the contract price. b. if a forward contract is used to hedge receivables, and the spot exchange rate at the time of expiration of contract is lower than the contract price. c. if a forward contract is used to hedge payables, and the spot exchange rate at the time of expiration of contract is lower than the contract price. d. if a forward contract is used to hedge payables or receivables and the amount to be received or paid is cancelled.

B

Which of the following is the most likely strategy for a U.S. firm that will be receiving Swiss francs in the future and desires to avoid exchange rate risk (assume the firm has no offsetting position in francs)? a. purchase a call option on francs. b. sell a futures contract on francs. c. obtain a forward contract to purchase francs forward. d. all of the above are appropriate strategies for the scenario described.

B

Which of the following would result in a profit of a euro futures contract when the euro depreciates? a. buy a euro futures contract; sell a futures contract after the euro has depreciated. b. sell a euro futures contract; buy a futures contract after the euro has depreciated. c. buy a euro futures contract; buy an additional futures contract after the euro has depreciated. d. none of the above would result in a profit when the euro depreciates.

B

Which of the following would result in a profit of a futures contract when the underlying currency depreciates? a. Buy a futures contract; sell a futures contract after the currency has depreciated b. Sell a futures contract; buy a futures contract after the currency has depreciated c. Buy a futures contract; buy an additional futures contract after the currency has depreciated d. None of the above would result in a profit when the underlying currency of the futures contract depreciates.

B

You purchase a call option on pounds for a premium of $.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 $1.65, your net profit per unit is: a. −$.03. b. −$.02. c. −$.01. d. $.02. e. none of the above

B

Currency futures contracts sold on an exchange: a. contain a commitment to the owner, and are standardized. b. contain a commitment to the owner, and can be tailored to the desire of the owner. c. contain a right but not a commitment to the owner, and can be tailored to the desire of the owner. d. contain a right but not a commitment to the owner, and are standardized.

A

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

A

If you have a position where you might be obligated to sell pounds, you are: a. a call writer. b. a call buyer. c. a put writer. d. a put buyer.

A

If your firm expects the euro to substantially depreciate, it could speculate by ____ euro call options or ____ euros forward in the forward exchange market. a. selling; selling b. selling; purchasing c. purchasing; purchasing d. purchasing; selling

A

The ____ the existing spot price relative to the strike price, the ____ valuable the call options will be. a. higher; less b. higher; more c. lower; less d. lower; more

A

The annualized forward premium on the euro is 7%. What is the 90-day forward rate on the euro if the spot rate today is $1.25? a. $1.27 b. $1.34 c. $1.16 d. $1.23

A

When the futures price is above the forward rate, astute investors may attempt to simultaneously buy a currency forward and sell futures in that currency. These actions would place ____ pressure on the forward rate and ____ pressure on the futures rate. a. upward; downward b. upward; upward c. downward; upward d. downward; downward

A

Which of the following is not true regarding options? a. Options are traded on exchanges, never over-the-counter. b. Similar to futures contracts, margin requirements are normally imposed on option traders. c. Although commissions for options are fixed per transaction, multiple contracts may be involved in a transaction, thus lowering the commission per contract. d. Currency options can be classified as either put or call options. e. All of the above are true.

A

Which of the following is true? a. The futures market is primarily used by speculators while the forward market is primarily used for hedging. b. The futures market is primarily used for hedging while the forward market is primarily used for speculating. c. The futures market and the forward market are primarily used for speculating. d. The futures market and the forward market are primarily used for hedging.

A

Andrea is an option speculator. She anticipates the Canadian dollar to depreciate from its current level of $0.90 to $0.85. Currently, Canadian dollar call options are available with an exercise price of $0.91 and a premium of $0.02. Also, Canadian dollar put options are available with an exercise price of $0.88 and a premium of $0.02. If the future spot rate of the Canadian dollar is $0.85, what is Andrea's profit or loss per unit? a. $0.03 b. $0.05 c. $0.01 d. $0.04

C

Assume no transactions costs exist for any futures or forward contracts. The price of British pound futures with a settlement date 180 days from now will: a. definitely be above the 180-day forward rate. b. definitely be below the 180-day forward rate. c. be about the same as the 180-day forward rate. d. none of the above; there is no relation between the futures and forward prices.

C

Assume that a currency's spot and future prices are the same, and the currency's interest rate is higher than the U.S. rate. The actions of U.S. investors to lock in this higher foreign return would ____ the currency's spot rate and ____ the currency's futures price. a. put upward pressure on; put upward pressure on b. put downward pressure on; put upward pressure on c. put upward pressure on; put downward pressure on d. put downward pressure on; put downward pressure on

C

Currency options are commonly traded through the ____ system. a. robot b. Euro c. GLOBEX d. Scope

C

If the spot rate of the euro increased substantially over a one-month period, the futures price on euros would likely ____ over that same period. a. increase slightly b. decrease substantially c. increase substantially d. stay the same

C

If you have a position where you might be obligated to buy Euros, you are: a. a call writer. b. a put writer. c. a put buyer. d. a futures seller.

C

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? a. purchase Canadian dollars forward. b. purchase Canadian dollar futures contracts. c. purchase Canadian dollar put options. d. purchase Canadian dollar call options.

C

The 180-day forward rate for the euro is $1.34, while the current spot rate of the euro is $1.29. What is the annualized forward premium or discount of the euro? a. 7.46% premium b. 7.46% discount c. 7.75% premium d. 7.75% discount

C

The 90-day forward rate for the euro is $1.07, while the current spot rate of the euro is $1.05. What is the annualized forward premium or discount of the euro? a. 1.9 percent discount. b. 1.9 percent premium. c. 7.6 percent premium. d. 7.6 percent discount.

C

The existing spot rate of the Canadian dollar is $.82. The premium on a Canadian dollar call option is $.04. The exercise price is $.81. The option will be exercised on the expiration date if at all. If the spot rate on the expiration date is $.87, the profit as a percent of the initial investment (the premium paid) is: a. 0 percent. b. 25 percent. c. 50 percent. d. 150 percent. e. none of the above

C

The shorter the time to the expiration date for a currency, the ____ will be the premium of a call option, and the ____ will be the premium of a put option, other things equal. a. greater; greater b. greater; lower c. lower; lower d. lower; greater

C

A U.S. corporation has purchased currency put options to hedge a 100,000 Canadian dollar (C$) receivable. The premium is $.01 and the exercise price of the option is $.75. If the spot rate at the time of maturity is $.85, what is the net amount received by the corporation if it acts rationally? a. $74,000. b. $84,000. c. $75,000. d. $85,000.

B

A call option on Japanese yen has a strike (exercise) price of $.012. The present exchange rate is $.011. This call option can be referred to as: a. in the money. b. out of the money. c. at the money. d. at a discount.

B

A call option premium has a lower bound that is equal to the greater of zero and the difference between the underlying ____ prices. The upper bound of a call option premium is the ____ price. a. spot and exercise; exercise b. spot and exercise; spot c. exercise and spot; exercise d. exercise and spot; spot

B

A forward rate for a currency is said to exhibit a discount if a. the forward rate exceeds the existing spot rate. b. the forward rate is less than the existing spot rate. c. the forward rate exceeds the expected future spot rate. d. the forward rate is less than the expected future spot rate. e. none of the above

B

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: a. in the money. b. out of the money. c. at the money. d. at a discount.

B

Assume that a speculator purchases a put option on British pounds (with a strike price of $1.50) for $.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: a. $1,562.50. b. −$1,562.50. c. −$1,250.00. d. −$625.00.

B

Assume that the British pound (£) futures price for September is $1.60. Given that 62,500 units are in a British pound futures contract, the seller of British pound futures will receive $____ on the delivery date. a. 39,062.50 b. 100,000 c. 48,000 d. 87,062.50

B

Conditional currency options are: a. options that do not require premiums. b. options where the premiums are canceled if a trigger level is reached. c. options that allow the buyer to decide what currency the option will be settled in. d. none of the above

B

Thornton, Inc. needs to invest five million Nepalese rupees in its Nepalese subsidiary to support local operations. Thornton would like its subsidiary to repay the rupees in one year. Thornton would like to engage in a swap transaction. Thus, Thornton would: a. convert the rupees to dollars in the spot market today and convert rupees to dollars in one year at today's forward rate. b. convert the dollars to rupees in the spot market today and convert dollars to rupees in one year at the prevailing spot rate. c. convert the dollars to rupees in the spot market today and convert rupees to dollars in one year at today's forward rate. d. convert the dollars to rupees in the spot market today and convert rupees to dollars in one year at the prevailing spot rate.

C

When the futures price is equal to the spot rate of a given currency, and the foreign country exhibits a higher interest rate than the U.S. interest rate, astute investors may attempt to simultaneously ____ the foreign currency, invest it in the foreign country, and ____ futures in the foreign currency. a. buy; buy b. sell; buy c. buy; sell d. buy; buy

C

Which of the following is not true regarding futures contracts? a. Unlike forward contracts, they are generally traded on an exchange. b. Futures contracts are standardized with respect to delivery date and size of the contract. c. There is an active over-the-counter market for currency futures contracts. d. Currency futures can be used by speculators who attempt to profit from exchange rate movements.

C

Which of the following is the most unlikely strategy for a U.S. firm that will be purchasing Swiss francs in the future and desires to avoid exchange rate risk (assume the firm has no offsetting position in francs)? a. purchase a call option on francs. b. obtain a forward contract to purchase francs forward. c. sell a futures contract on francs. d. all of the above are appropriate strategies for the scenario described.

C

Which of the following is true of options? a. The writer decides whether the option will be exercised. b. The writer pays the buyer the option premium. c. The buyer decides if the option will be exercised. d. More than one of these.

C

Which of the following is true regarding the options markets? a. Hedgers and speculators both attempt to lower risk. b. Hedgers attempt to lower risk, while speculators attempt to make riskless profits. c. Hedgers and speculators are both necessary in order for the market to be liquid. d. all of the above

C

You are a speculator who sells a call option on Swiss francs for a premium of $.06, with an exercise price of $.64. The option will not be exercised until the expiration date, if at all. If the spot rate of the Swiss franc is $.69 on the expiration date, your net profit per unit, assuming that you have to buy Swiss francs in the market to fulfill your obligation, is: a. −$.02. b. −$.01. c. $.01. d. $.02. e. none of the above

C

A U.S. corporation has purchased currency call options to hedge a 70,000 pound (£) payable. The premium is $0.02 and the exercise price of the option is $0.50. If the spot rate at the time of maturity is $0.65, what is the total amount paid by the corporation if it acts rationally? a. $33,600 b. $46,900 c. $44,100 d. $36,400

D

A U.S. corporation has purchased currency call options to hedge a 70,000 pound payable. The premium is $.02 and the exercise price of the option is $.50. If the spot rate at the time of maturity is $.65, what is the total amount paid by the corporation if it acts rationally? a. $33,600. b. $46,900. c. $44,100. d. $36,400.

D

A U.S. firm is bidding for a project needed by the Swiss government. The firm will not know if the bid is accepted until three months from now. The firm will need Swiss francs to cover expenses but will be paid by the Swiss government in dollars if it is hired for the project. The firm can best insulate itself against exchange rate exposure by: a. selling futures in francs. b. buying futures in francs. c. buying franc put options. d. buying franc call options.

D

A firm wants to use an option to hedge 12.5 million in receivables from New Zealand firms. The premium is $.03. The exercise price is $.55. If the option is exercised, what is the total amount of dollars received (after accounting for the premium paid)? a. $6,875,000. b. $7,250,000. c. $7,000,000. d. $6,500,000. e. none of the above

D

Assume the spot rate of a currency is $.37 and the 90-day forward rate is $.36. The forward rate of this currency exhibits a ____ of ____ on an annualized basis. a. discount; 11.11% b. premium; 11.11% c. premium; 10.81% d. discount; 10.81%

D

Assume the spot rate of the Swiss franc is $.62 and the one-year forward rate is $.66. The forward rate exhibits a ____ of ____. a. premium; about 6% b. discount; about 6% c. discount; about 6.45% d. premium; about 6.45%

D

Currency options sold through an options exchange: a. contain a commitment to the owner, and are standardized. b. contain a commitment to the owner, and can be tailored to the desire of the owner. c. contain a right but not a commitment to the owner, and can be tailored to the desire of the owner. d. contain a right but not a commitment to the owner, and are standardized.

D

If the spot rate of the British pound is $1.50, and the one-year forward rate has a discount of 3 percent, the one-year forward rate is $____. a. 1.50 b. 1.47 c. 1.55 d. 1.46 e. None of the above

D

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

D

J&L Co. is a U.S.-based MNC that frequently exports computers to Italy. J&L typically invoices these goods in euros and is concerned that the euro will depreciate in the near future. Which of the following is not an appropriate technique under these circumstances? a. purchase euro put options. b. sell euros forward. c. sell euro futures contracts. d. sell euro put options.

D

Macomb Corporation is a U.S. firm that invoices some of its exports in Japanese yen. If it expects the yen to weaken, it could ____ to hedge the exchange rate risk on those exports. a. sell yen put options b. buy yen call options c. buy futures contracts on yen d. sell futures contracts on yen

D

The ____ the existing spot price relative to the strike price, the ____ valuable the put options will be. a. higher; less b. higher; more c. lower; less d. lower; more

D

The premium of a currency put option will increase if: a. the volatility of the underlying asset goes up. b. the time to maturity goes up. c. the spot rate declines. d. none of the above

D

The premium on a euro call option is $.02. The exercise price is $1.32. The break-even point is ____ for the buyer of the call, and ____ for the seller of the call. (Assume zero transactions costs and that the buyer and seller of the put option are speculators.) a. $1.30; $1.30 b. $1.34; $1.30 c. $1.30; $1.34 d. $1.34; $1.34

D

The premium on a pound put option is $.04. The spot rate and the exercise price is $1.52. The spot rate at the time of this option expiration is expected to be $1.51. The speculators could profit by: a. writing a put option. b. buying a put option. c. buying a call option d. writing a call option and buying a call option simultaneously.

D

The spot rate for the Singapore dollar is $.588. The 30-day forward rate is $.590. The forward rate contains an annualized ____ of ____%. a. discount; −4.07 b. premium; 4.07 c. discount; −4.08 d. premium; 4.08 e. premium; 3.40

D

The spot rate of British pound is quoted at $1.49. The 90-day forward rate exhibits a 2% discount. What is the 90-day forward rate of the pound? a. $1.52 b. $1.61 c. $1.37 d. $1.46

D

When currency options are not standardized and traded over-the-counter, there is ____ liquidity and a ____ bid/ask spread. a. less; narrower b. more; narrower c. more; wider d. less; wider

D

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

D

When you own ____, there is no obligation on your part; however, when you own ____, there is an obligation on your part. a. call options; put options b. futures contracts; call options c. forward contracts; futures contracts d. put options; forward contracts

D

Which of the following is correct? a. The longer the time to maturity, the less the value of a currency call option, other things equal. b. The longer the time to maturity, the less the value of a currency put option, other things equal. c. The higher the spot rate relative to the exercise price, the greater the value of a currency put option, other things equal. d. The lower the exercise price relative to the spot rate, the greater the value of a currency call option, other things equal.

D

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

D

Which of the following is true for futures, but not for forwards? a. actual delivery. b. no transactions costs. c. self regulation. d. none of the above

D

Which of the following is true? a. Most forward contracts between firms and banks are for speculative purposes. b. Most future contracts represent a conservative approach by firms to hedge foreign trade. c. The forward contracts offered by banks have maturities for only four possible dates in the future. d. none of the above

D

Your company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to hedge your position by selling Japanese yen forward. The current spot rate of the yen is $.0089, while the forward rate is $.0095. You expect the spot rate in 60 days to be $.0090. How many dollars will you receive for the 5,000,000 yen 60 days from now? a. $44,500. b. $45,000. c. $526 million. d. $47,500.

D

If you purchase a straddle on euros, this implies that you: a. finance the purchase of a call option by selling a put option in the euros. b. finance the purchase of a call option by selling a call option in the euros. c. finance the purchase of a put option by selling a put option in the euros. d. finance the purchase of a put option by selling a call option in the euros. e. none of the above

E

The premium on a pound put option is $.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.) a. $1.63; $1.63 b. $1.63; $1.60 c. $1.63; $1.57 d. $1.57; $1.63 e. none of the above

E

Which of the following is not an instrument used by U.S.-based MNCs to cover their foreign currency positions? a. forward contracts. b. futures contracts. c. non-deliverable forward contracts. d. options. e. all of the above are instruments used to cover foreign currency positions.

E

You are a speculator who sells a put option on Canadian dollars for a premium of $.03 per unit, with an exercise price of $.86. The option will not be exercised until the expiration date, if at all. If the spot rate of the Canadian dollar is $.78 on the expiration date, your net profit per unit is: a. −$.08. b. −$.03. c. $.05. d. $.08. e. none of the above

E

You purchase a put option on Swiss francs for a premium of $.02, with an exercise price of $.61. The option will not be exercised until the expiration date, if at all. If the spot rate on the expiration date is $.58, your net profit per unit is: a. −$.03. b. −$.02. c. −$.01. d. $.02. e. none of the above

E

European currency options can be exercised ____; American currency options can be exercised ____. a. any time up to the expiration date; any time up to the expiration date b. any time up to the expiration date; only on the expiration date c. only on the expiration date; only on the expiration date d. only on the expiration date; any time up to the expiration date

d

A call option on Australian dollars has a strike (exercise) price of $.56. The present exchange rate is $.59. This call option can be referred to as: a. in the money. b. out of the money. c. at the money. d. at a discount.

A

A firm sells a currency futures contract, and then decides before the settlement date that it no longer wants to maintain such a position. It can close out its position by: a. buying an identical futures contract. b. selling an identical futures contract. c. buying a futures contract with a different settlement date. d. selling a futures contract for a different amount of currency. e. purchasing a put option contract in the same currency.

A

A put option on Swiss franc has a strike (exercise) price of $.92. The present exchange rate is $.89. This put option can be referred to as: a. in the money. b. out of the money. c. at the money. d. at a discount.

A

As mentioned in the text, the most common maturities for forward rates are: a. one, three, six, and twelve months. b. one, three, six, and twelve years. c. two, three, and five years. d. two, three, and five weeks.

A

Assume that a speculator received news that makes her believe that the yen will appreciate or depreciate substantially in the near future, but she is not certain of the direction. Also assume that exercise price of call and put options are the same. The most appropriate method for speculation is ____and it may be achieved by ____. a. straddle; purchase put option and purchase call option. b. strangle; purchase put option and sell call option. c. strangle; sell put option and sell put option. d. straddle; sell put option and buy call option.

A

Carl is an option writer. In anticipation of a depreciation of the British pound from its current level of $1.50 to $1.45, he has written a call option with an exercise price of $1.51 and a premium of $.02. If the spot rate at the option's maturity turns out to be $1.54, what is Carl's profit or loss per unit (assuming the buyer of the option acts rationally)? a. −$0.01. b. $0.01. c. −$0.04. d. $0.04. e. −$0.03.

A

Currency futures can be used by MNCs to hedge payables. That is, an MNC would ____ futures to hedge a foreign payable position. Also, currency futures can be used for speculation. For example, a speculator expecting a currency to appreciate would ____ futures. a. buy; buy b. sell; sell c. buy; sell d. sell; buy

A

A put option premium has a lower bound that is equal to the greater of zero and the difference between the underlying ____ prices. The upper bound of a call option premium is the ____ price. a. spot and exercise; exercise b. spot and exercise; spot c. exercise and spot; exercise d. exercise and spot; spot

C