Fin 481, Sheen Liu, Test 3

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. $1.50/euro b. $1.45/euro c. $1.40/euro d. $1.35/euro

a. $1.50/euro

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. European; American b. American; British c. Asian; American d. American; European

a. European; American

The reference rate of interest in the eurocurrency market is the: a. London Interbank Offered Rate b. Treasury Rate c. Prima rate d. federal funds rate

a. London Interbank Offered Rate

An option whose exercise price is equal to the spot rate is said to be: a. at-the-money b. out-of-the-money c. in-the-money d. on-the-spot

a. at-the-money

Dash Brevenshure works for the currency trading unit of ING Bank in London. He speculates that in the coming months the dollar will drop sharply vs. the pound. What should Dash do to act on his specualation? a. buy a call on the pound b. sell a put on the pound c. sell a call on the pound d. buy a put on the pound

a. buy a call on the pound

___ is the possibility that the borrower's creditworthiness is reclassified by the lender at the time of renewing credit. ___ is the risk of changes in interest rates charged at the time a financial contract rate is set. a. credit risk; repricing risk b. interest rate risk; credit risk c. credit risk; interest rate risk d. repricing risk; credit risk

a. credit risk; repricing risk

An interbank-traded contract to buy or sell interest rate payments on a notional principal is called a/an: a. forward rate agreement b. interest rate swap c. interest rate future d. none of the above

a. forward rate agreement

A foreign currency ___ contract calls for the delivery of a standard amount of foreign exchange at a place, price, and fixed future time. a. futures b. option c. swap d. forward

a. futures

The ___ of an option is the value if the option were to be exercised immediately. It sis the option's ___ value. a. intrinsic value; minimum b. time value; maximum c. intrinsic value; maximum d. time value; minimum

a. intrinsic value; minimum

Futures contracts require that the purchaser deposit an initial sum as collateral. This deposit is called a: a. margin b. collateralized deposit c. settlement d. marked market sum

a. margin

Traders who believe volatilities will fall significantly in the near-term will: a. sell options now b. sell futures now c. buy futures now d. buy options now

a. sell options now

As a put option moves further in-the-money delta moves toward: a. 0 b. -1 c. large numbers d. 1

b. -1

As an option moves further out-of-the-money, delta moves toward: a. large negative numbers b. 0 c. -1 d. 1

b. 0

Assume that a call option has an exercise price of $1.50/£. At a spot price of $1.54/£, the call option has: a. a time value of $0.00 b. an intrinsic value of $0.04 c. an intrinsic value of $0.00 d. a time value of $0.04

b. an intrinsic value of $0.04

Your US firm has an accounts receivable 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 call option b. buy a pound put option c. sell a pound put option d. sell a pound call option

b. buy a pound put option

A speculator that has ___ a futures contract has taken a ___ position. (Sold, long, purchased, short) a. sold; long b. purchased; long c. sold; purchase d. purchased; short

b. purchased; long

The maximum gain for the purchaser of a call option contract is ___ while the maximum loss is ___. a. unlimited; the value of the underlying asset b. unlimited; the premium paid c. the premium paid; unlimited d. unlimited; unlimited

b. unlimited; the premium paid

A call option on UK pounds has a strike price of $2.03/£ 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

c. $2.05/£

If a financial manager earning interest on a future date were to buy futures and interest rates end up going down, the position outcome would be: a. futures price falls; long earns a loss b. futures price rises; short earns a loss c. futures price rises; long earns a profit d. futures price falls; short earns a profit

c. futures price rises; long earns a profit

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 markers; over-the-counter b. government sponsored; private c. over-the-counter; exchange markets d. private; government sponsored

c. over-the-counter; exchange markets

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

c. ¥115/$

About ___ percent of all futures contracts are settled by physical delivery of foreign exchange between buyer and seller. a. 0 b. 50 c. 95 d. 5

d. 5%

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

d. A and B

Individual borrowers-whether they be governments or companies-possess their own individual credit rating, the market's assessment of their ability to repay debt in a timely manner. These credit assessments influence all the following except: a. cost of capital b. access to capital c. credit risk premium d. all of the above

d. all of the above

The main advantage(s) of over-the-counter foreign currency options over exchange traded options is (are): a. amounts that are tailor made b. expiration dates tailored to the needs of the client c. client desired expiration dates d. all of the above

d. all of the above

The buyer of a long call option: a. has a gain equal to but opposite in sign to the writer of the option b. has a maximum loss equal to the premium paid c. has an unlimited maximum gain potential d. all the above

d. all the above

Which of the following is NOT a factor in determining the premium price of a currency option? a. the present spot rate b. the time to maturity c. the standard deviation of the daily spot price movement d. all the above are factors in determining the premium price

d. all the above are factors in determining the premium price

Which of the following is NOT true for the writer of a put option? a. The gain or loss is equal to but of the opposite sign of the buyer of a put option b. the maximum gain is the amount of the premium c. the maximum loss is limited to the strike price of the underlying asset less the premium d. all the above are true

d. all the above are true

The single largest interest rate risk of a firm is: a. dividend payments b. accounts payable c. interest sensitive securities d. debt service

d. debt service

If a financial manager with an interest liability on a future date were to sell futures and interest rates end up going up, the position outcome would be: a. futures price rises; long earns a profit b. futures price falls; long earns a loss c. futures price rises; short earns a loss; d. futures price falls; short earns a profit

d. futures price falls; short earns a profit

Rho

expected change in the option premium for a small change in the domestic interest rate

Phi

expected change in the option premium for a small change in the foreign interest rate

Delta

expected change in the option premium for a small change in the spot rate

Theta

expected change in the option premium for a small change in time to expiration

Lambda

expected change in the option premium for a small change in volatility