ACCT-4315 CHAPTER 5

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 these are true.

a. Options are traded on exchanges, never over-the-counter.

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. a call writer.

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. straddle; purchase put option and purchase call option.

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. upward; downward

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. $1.30

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. $84,000.

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. 220,000

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 these

b. Corporations who expect to buy foreign currency to finance foreign subsidiaries.

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 these would result in a profit when the underlying currency of the futures contract depreciates.

b. Sell a futures contract; buy a futures contract after the currency has depreciated

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 these

b. be paid; 20,000

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. buying; selling; buying

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. contain a commitment to the owner, and can be tailored to the desire of the owner.

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. the spot rate of the currency is greater than the exercise price of the option.

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 these

b. −$.02.

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. −$1,562.50.

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 these

c. 50 percent.

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. 7.6 percent premium.

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. 7.75% premium

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

c. GLOBEX

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. There is an active over-the-counter market for currency futures contracts.

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. put upward pressure on; put downward pressure on

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. $1.34; $1.34

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. $36,400

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 these

d. $6,500,000.

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. The lower the exercise price relative to the spot rate, the greater the value of a currency call option, other things equal.

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

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. discount; 10.81%

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. o; forward contracts

d. o; forward contracts

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. premium; 4.08

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. sell a euro call and buy a euro put

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. buy; buy

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. buying an identical futures contract.

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. contain a commitment to the owner, and are standardized.

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. higher; less

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. in the money.

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. in the money.

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. 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.

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 these

b. options where the premiums are canceled if a trigger level is reached.

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. out of the money.

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. out of the money.

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

b. put buyer.

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 these would result in a profit when the euro depreciates.

b. sell a euro futures contract; buy a futures contract after the euro has depreciated.

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 these are appropriate strategies for the scenario described.

b. sell a futures contract on francs.

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. sell yen; loss of $60,000

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. lower; lower