Fin 582 Chapter 5 quiz

Which of the following contingency graphs best describes the potential profit or loss for the buyer of a currency put option? a. b. c. d.

A

Which of the following contingency graphs best describes the potential profit or loss for the buyer of a currency call option? a. b. c. d.

D

Put and call options are available on euros (€) with the following information: Call option premium on euro = $.02 per unit Put option premium on euro = $.015 per unit Call option strike price = $1.12 Put option strike price = $1.10 One option contract represents €62,500. Peter Porter constructs a long strangle using euros. What are the two break-even points for this position? a. $1.065 and $1.155 b. $1.005 and $1.135 c. $1.085 and $1.115 d. $1.095 and $1.155 e. $1.065 and $1.135

a. $1.065 and $1.155

Put and call options are available on euros (€) with the following information: Call option premium on euro = $.02 per unit Put option premium on euro = $.015 per unit Call option strike price = $1.12 Put option strike price = $1.10 One option contract represents €62,500. The maximum loss for the long strangle position is $________ per unit. The maximum loss occurs at future spot prices ________. a. 0.035; between the two exercise prices b. 0.02; between the two exercise prices c. 0.035; below the put option strike price d. 0.015; between the two exercise prices e. 0.035; above the call option strike price

a. 0.035; between the two exercise prices

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. 1.46 b. 1.50 c. 1.55 d. 1.47 e. None of these choices are correct.

a. 1.46

When the futures price is below the forward rate, astute investors may attempt to simultaneously ________ a currency forward and ________ futures in that currency. a. Sell; buy b. Buy; sell c. Sell; sell d. Buy; buy

a. Sell; buy

A strangle can be constructed in a variety of ways. a. True b. False

a. True

If the underlying currency depreciates substantially, the straddle writer has to buy the currency for the strike price, since the call option will be exercised. a. True b. False

a. True

Many MNCs use forward contracts. a. True b. False

a. True

Non-deliverable forward contracts (NDFs) are frequently used for currencies in emerging markets. a. True b. False

a. True

Since futures contracts are standardized, an MNC using futures contracts to hedge foreign payable or receivable positions may not be able to hedge the amount of the payable or receivable perfectly. a. True b. False

a. True

Using currency derivatives for speculation is not consistent with the general operations of an MNC. a. True b. False

a. True

When the current exchange rate equals the exercise price, both a call and a put option with that exercise price will be at the money. a. True b. False

a. True

Trebble, Inc. is a U.S.-based MNC that will need 2 million euros in 90 days to purchase European imports. Therefore, Trebble purchases a forward contract at a forward rate of $1.05. If the spot rate of the euro in 90 days is $1.00, Trebble will pay $________ for the euros and ________ incur an opportunity cost. a. 2,100,000; does not b. 2,100,000; does c. 2,000,000; does d. 2,000,000; does not e. None of these choices are correct.

b. 2,100,000; does

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. Buy; sell c. Sell; buy d. Sell; sell

b. Buy; sell

A European option can be exercised at any time prior to maturity, while an American option can only be exercised at maturity. a. True b. False

b. False

The break-even point for a put option buyer occurs when the revenue from selling the currency in the spot market is equal to the exercise price and the premium paid. a. True b. False

b. False

To hedge payables in a foreign currency, corporations would sell futures contracts; to hedge receivables in a foreign currency, corporations would buy futures contracts. a. True b. False

b. False

Which of the following is the least likely 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. 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. Sell a futures contract on francs.

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

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

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

b. a commitment to the owner, and can be tailored to the owner's desire.

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

b. futures contracts; call options

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

c. In the money; out of the money

A U.S.-based MNC knows that it will receive 125,000 Singapore dollars (S$) in 30 days from a customer that has proven to be creditworthy in the past. Both futures contracts and appropriate options with maturity dates in 30 days are available. Under this scenario, what would be the best way for the MNC to hedge its position against fluctuations in the Singapore dollar's value? a. Sell a put option b. Buy S$ futures c. Sell S$ futures d. Buy a put option

c. Sell S$ futures

Put and call options are available on Canadian dollars (C$) with the following information: Call option premium on Canadian dollar = $.03 per unit Put option premium on Canadian dollar = $.02 per unit Call option strike price = $0.77 Put option strike price = $0.77 One option contract represents C$50,000. If you construct a short straddle position, what are the two break-even points for this position? a. $0.74 and $0.80 b. $0.75 and $0.80 c. $0.74 and $0.82 d. $0.72 and $0.82 e. $0.75 and $0.79

d. $0.72 and $0.82

The premium on a pound put option is $.04 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. $1.64; $1.56 b. $1.56; $1.60 c. $1.64; $1.64 d. $1.56; $1.56

d. $1.56; $1.56

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 $0.02. 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. $0.04 b. -$0.04 c. -$0.03 d. -$0.01 e. $0.01

d. -$0.01

Put and call options are available on Canadian dollars (C$) with the following information: Call option premium on Canadian dollar = $.03 per unit Put option premium on Canadian dollar = $.02 per unit Call option strike price = $0.77 Put option strike price = $0.77 One option contract represents C$50,000. If the spot price of the Canadian dollar at option expiration is $0.80, the profit or loss from the short straddle position is a $________ per unit. Assume that you do not own any previously purchased Canadian dollars. a. 0.02 loss b. 0.05 profit c. 0.03 profit d. 0.02 profit e. 0.05 loss

d. 0.02 profit

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. 87,062.50 b. 48,000 c. 39,062.50 d. 100,000

d. 100,000

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. selling an identical futures contract. b. selling a futures contract for a different amount of currency. c. buying a futures contract with a different settlement date. d. buying an identical futures contract.

d. buying an identical futures contract

The longer 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 being equal. a. greater; lower b. lower; lower c. lower; greater d. greater; greater

d. greater; greater

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

d. purchasing; purchasing

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

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

The one-year forward rate of the British pound is quoted at $1.50, and the spot rate of the British pound is quoted at $1.515. The forward ____ is ____ percent. a. discount; 1.0 b. discount; 1.5 c. premium; 1.5 d. premium; 1.0

a. discount; 1.0

The lower 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 being equal. a. greater; greater b. lower; lower c. lower; greater d. greater; lower

b. lower; lower