Exam 5: Currency Derivatives

American-style options can be exercised any time up to maturity.

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 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:

​Which of the following is true of options?

​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.

Since futures contracts are traded on an exchange, the exchange will always take the "other side" of the transaction in terms of accepting the credit risk.

The writer of a put option has a right, but not an obligation, to buy the underlying currency from the option buyer.

​If the observed put option premium is less than what is suggested by the put-call parity equation, astute speculators could make a profit by ____ the put option, ____ the call option, and ____ the underlying currency.

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

Which of the following are most commonly traded on an exchange?

The premium on a pound put option is $.04. The spot rate and the exercise price are $1.52. The spot rate at the time of this option expiration is expected to be $1.51. Speculators could profit by:

If the forward rate for a currency is less than the spot rate for that currency, the forward rate is said to exhibit a premium.

Hedgers should buy puts if they are hedging an expected inflow of foreign currency.

Managers of MNCs are typically expected to use currency derivatives for speculation in order to improve profits.

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

The premium of a currency put option should decrease if:

​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:

Currency options are commonly traded through the ____ system.

​If you have bought a right to buy foreign currency, you are:

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?