Question 1

Currency options are only traded on exchanges. That is, there is no over-the-counter market for options.

Accepted Answer

A) True 
 B)False

Question 2

Hedgers should buy calls if they are hedging an expected outflow of foreign currency.

Accepted Answer

A) True 
 B)False

Question 3

If a currency's forward rate exhibits a premium, that currency is forced to depreciate.

Accepted Answer

A) True 
 B)False

Question 4

Forward contracts are usually negotiated with a commercial bank, while futures contracts are traded on an organized exchange.

Accepted Answer

A) True 
 B)False

Question 5

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.​

Accepted Answer

A)  ​buy; buy 
B)  ​sell; sell 
C)  ​buy; sell 
D)  ​sell; buy 
A)  ​buy; buy 
B)  ​sell; sell 
C)  ​buy; sell 
D)  ​sell; buy

Question 6

Which of the following is not true regarding futures contracts?

Accepted Answer

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. 
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.

Question 7

​Which of the following is correct?

Accepted Answer

A)  ​The longer the time to maturity, the lower the value of a currency call option, other things being equal. 
B)  ​The longer the time to maturity, the lower the value of a currency put option, other things being equal. 
C)  ​The higher the spot rate relative to the exercise price, the greater the value of a currency put option, other things being equal. 
D)  ​The lower the exercise price relative to the spot rate, the greater the value of a currency call option, other things being equal. 
A)  ​The longer the time to maturity, the lower the value of a currency call option, other things being equal. 
B)  ​The longer the time to maturity, the lower the value of a currency put option, other things being equal. 
C)  ​The higher the spot rate relative to the exercise price, the greater the value of a currency put option, other things being equal. 
D)  ​The lower the exercise price relative to the spot rate, the greater the value of a currency call option, other things being equal.

Question 8

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:

Accepted Answer

A)  0 percent 
B)  25 percent 
C)  50 percent 
D)  150 percent 
E)  None of these are correct. 
A)  0 percent 
B)  25 percent 
C)  50 percent 
D)  150 percent 
E)  None of these are correct.

Question 9

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)?

Accepted Answer

A)  -$.01 
B)  $.01 
C)  -$.04 
D)  $.04 
E)  -$.03 
A)  -$.01 
B)  $.01 
C)  -$.04 
D)  $.04 
E)  -$.03

Question 10

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:

Accepted Answer

A) -$.03. 
B)  -$.02. 
C)  -$.01. 
D)  $.02. 
E)  None of these are correct. 
A) -$.03. 
B)  -$.02. 
C)  -$.01. 
D)  $.02. 
E)  None of these are correct.

Question 11

Due to put-call parity, we can use the same formula to price calls and puts.

Accepted Answer

A) True 
 B)False

Question 12

There are no transactions costs associated with trading futures or options.

Accepted Answer

A) True 
 B)False

Question 13

If the futures rate is above the forward rate, actions by rational investors would put upward pressure on the forward rate and downward pressure on the futures rate.

Accepted Answer

A) True 
 B)False

Question 14

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.​

Accepted Answer

A)  ​upward; downward 
B)  ​upward; upward 
C)  ​downward; upward 
D)  ​downward; downward 
A)  ​upward; downward 
B)  ​upward; upward 
C)  ​downward; upward 
D)  ​downward; downward

Question 15

If a currency call option is in the money, then the present exchange rate exceeds the strike price.

Accepted Answer

A) True 
 B)False

Question 16

The purchase of a currency put option would be appropriate for which of the following?

Accepted Answer

A)  investors who expect to buy a foreign bond in one month 
B)  corporations that expect to buy foreign currency to finance foreign subsidiaries 
C)  corporations that expect to collect on a foreign account receivable in one month 
D)  All of these are correct. 
A)  investors who expect to buy a foreign bond in one month 
B)  corporations that expect to buy foreign currency to finance foreign subsidiaries 
C)  corporations that expect to collect on a foreign account receivable in one month 
D)  All of these are correct.

Question 17

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 $____.

Accepted Answer

A)  1.50 
B)  1.47 
C)  1.55 
D)  1.46 
E)  None of these are correct. 
A)  1.50 
B)  1.47 
C)  1.55 
D)  1.46 
E)  None of these are correct.

Question 18

​European currency options can be exercised ____; American currency options can be exercised ____.

Accepted Answer

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 
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

Question 19

The forward premium is the price specified in a call or put option.

Accepted Answer

A) True 
 B)False

Question 20

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 ____ $____.

Accepted Answer

A)  pay; 20,000 
B)  be paid; 20,000 
C)  pay; 2,000 
D)  be paid; 2,000 
E)  None of these are correct. 
A)  pay; 20,000 
B)  be paid; 20,000 
C)  pay; 2,000 
D)  be paid; 2,000 
E)  None of these are correct.

Currency options are only traded on exchanges. That is, there is no over-the-counter market for options.

Hedgers should buy calls if they are hedging an expected outflow of foreign currency.

If a currency's forward rate exhibits a premium, that currency is forced to depreciate.

Forward contracts are usually negotiated with a commercial bank, while futures contracts are traded on an organized exchange.

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.

Which of the following is not true regarding futures contracts?

Which of the following is correct?

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:

Due to put-call parity, we can use the same formula to price calls and puts.

There are no transactions costs associated with trading futures or options.

If the futures rate is above the forward rate, actions by rational investors would put upward pressure on the forward rate and downward pressure on the futures rate.

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.

If a currency call option is in the money, then the present exchange rate exceeds the strike price.

The purchase of a currency put option would be appropriate for which of the following?

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 $____.

European currency options can be exercised ; American currency options can be exercised .

The forward premium is the price specified in a call or put option.

Multinational Financial Management: an Overview

International Flow of Funds

International Financial Markets

Exchange Rate Determination

Government Influence on Exchange Rates

International Arbitrage and Interest Rate Parity

Relationships Among Inflation, Interest Rates, and Exchange Rates

Forecasting Exchange Rates

Measuring Exposure to Exchange Rate Fluctuations

Managing Transaction Exposure

Managing Economic Exposure and Translation Exposure

Direct Foreign Investment

Multinational Capital Budgeting

International Corporate Governance and Control

Country Risk Analysis

Multinational Capital Structure and Cost of Capital

Long-Term Debt Financing

Financing International Trade

Short-Term Financing

International Cash Management

Filters

Exam 5: Currency Derivatives

Currency options are only traded on exchanges. That is, there is no over-the-counter market for options.

Hedgers should buy calls if they are hedging an expected outflow of foreign currency.

If a currency's forward rate exhibits a premium, that currency is forced to depreciate.

Forward contracts are usually negotiated with a commercial bank, while futures contracts are traded on an organized exchange.

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.​

Which of the following is not true regarding futures contracts?

​Which of the following is correct?

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:

Due to put-call parity, we can use the same formula to price calls and puts.

There are no transactions costs associated with trading futures or options.

If the futures rate is above the forward rate, actions by rational investors would put upward pressure on the forward rate and downward pressure on the futures rate.

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.​

If a currency call option is in the money, then the present exchange rate exceeds the strike price.

The purchase of a currency put option would be appropriate for which of the following?

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 $____.

​European currency options can be exercised ____; American currency options can be exercised ____.

The forward premium is the price specified in a call or put option.

Multinational Financial Management: an Overview

International Flow of Funds

International Financial Markets

Exchange Rate Determination

Government Influence on Exchange Rates

International Arbitrage and Interest Rate Parity

Relationships Among Inflation, Interest Rates, and Exchange Rates

Forecasting Exchange Rates

Measuring Exposure to Exchange Rate Fluctuations

Managing Transaction Exposure

Managing Economic Exposure and Translation Exposure

Direct Foreign Investment

Multinational Capital Budgeting

International Corporate Governance and Control

Country Risk Analysis

Multinational Capital Structure and Cost of Capital

Long-Term Debt Financing

Financing International Trade

Short-Term Financing

International Cash Management

Filters

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.

Which of the following is correct?

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.

European currency options can be exercised ; American currency options can be exercised .