Question 1

If an actual put option premium is less than what is suggested by the put-call parity relationship, arbitrage can be conducted.

Accepted Answer

A) True 
 B)False

Question 2

A currency put option is a contract specifying a standard volume of a particular currency to be exchanged on a specific settlement date.

Accepted Answer

A) True 
 B)False

Question 3

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?

Accepted Answer

A) $33,600. 
B) $46,900. 
C) $44,100. 
D) $36,400. 
A) $33,600. 
B) $46,900. 
C) $44,100. 
D) $36,400.

Question 4

The annualized forward premium on the euro is 7 percent. What is the 90-day forward rate on the euro if the spot rate today is $1.25?

Accepted Answer

A) $1.27 
B) $1.34 
C) $1.16 
D) $1.23 
A) $1.27 
B) $1.34 
C) $1.16 
D) $1.23

Question 5

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

Accepted Answer

A) forward contracts 
B) futures contracts 
C) currencies 
D) none of the above 
A) forward contracts 
B) futures contracts 
C) currencies 
D) none of the above

Question 6

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?

Accepted Answer

A) $74,000. 
B) $84,000. 
C) $75,000 
D) $85,000. 
A) $74,000. 
B) $84,000. 
C) $75,000 
D) $85,000.

Question 7

Which of the following is true regarding options?​

Accepted Answer

A) Options are only traded over-the-counter. 
B) Speculators sell at-the-money put options when they expect that the currency's value will rise. 
C) Speculators purchase at-the-money call options when they expect that the currency's value will fall. 
D) Speculators sell at-the-money currency call options when they expect that the currency's value will rise. 
A) Options are only traded over-the-counter. 
B) Speculators sell at-the-money put options when they expect that the currency's value will rise. 
C) Speculators purchase at-the-money call options when they expect that the currency's value will fall. 
D) Speculators sell at-the-money currency call options when they expect that the currency's value will rise.

Question 8

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.)​

Accepted Answer

A) $1.30; $1.30 
B) $1.34; $1.30 
C) $1.30; $1.34 
D) $1.34; $1.34 
A) $1.30; $1.30 
B) $1.34; $1.30 
C) $1.30; $1.34 
D) $1.34; $1.34

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) -$0.01. 
B) $0.01. 
C) -$0.04. 
D) $0.04. 
E) -$0.03. 
A) -$0.01. 
B) $0.01. 
C) -$0.04. 
D) $0.04. 
E) -$0.03.

Question 10

If an investor who has previously purchased a futures contract wishes to liquidate her position, she would sell an identical futures contract with the same settlement date.

Accepted Answer

A) True 
 B)False

Question 11

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 12

The lower bound of the call option premium is the greater of zero and the difference between the spot rate and the exercise price; the upper bound of a currency call option is the spot rate.

Accepted Answer

A) True 
 B)False

Question 13

The premium on a pound put option is $.03 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.)

Accepted Answer

A) $1.63; $1.63 
B) $1.63; $1.60 
C) $1.63; $1.57 
D) $1.57; $1.63 
E) none of the above 
A) $1.63; $1.63 
B) $1.63; $1.60 
C) $1.63; $1.57 
D) $1.57; $1.63 
E) none of the above

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

A straddle can only be achieved if the exercise prices of put and call options are the same.

Accepted Answer

A) True 
 B)False

Question 16

Thornton, Inc. needs to invest 5 million Nepalese rupees in its Nepalese subsidiary to support local operations. Thornton would like its subsidiary to repay the rupees in one year. Thornton would like to engage in a swap transaction. Thus, Thornton would:

Accepted Answer

A) convert the rupees to dollars in the spot market today and convert rupees to dollars in one year at today's forward rate. 
B) convert the dollars to rupees in the spot market today and convert dollars to rupees in one year at the prevailing spot rate. 
C) convert the dollars to rupees in the spot market today and convert rupees to dollars in one year at today's forward rate. 
D) convert the dollars to rupees in the spot market today and convert rupees to dollars in one year at the prevailing spot rate. 
A) convert the rupees to dollars in the spot market today and convert rupees to dollars in one year at today's forward rate. 
B) convert the dollars to rupees in the spot market today and convert dollars to rupees in one year at the prevailing spot rate. 
C) convert the dollars to rupees in the spot market today and convert rupees to dollars in one year at today's forward rate. 
D) convert the dollars to rupees in the spot market today and convert rupees to dollars in one year at the prevailing spot rate.

Question 17

A forward rate for a currency is said to exhibit a discount if:​

Accepted Answer

A) the forward rate exceeds the existing spot rate. 
B) the forward rate is less than the existing spot rate. 
C) the forward rate exceeds the expected future spot rate. 
D) the forward rate is less than the expected future spot rate. 
E) none of the above 
A) the forward rate exceeds the existing spot rate. 
B) the forward rate is less than the existing spot rate. 
C) the forward rate exceeds the expected future spot rate. 
D) the forward rate is less than the expected future spot rate. 
E) none of the above

Question 18

Currency futures contracts sold on an exchange contain:

Accepted Answer

A) a commitment to the owner, and are standardized. 
B) a commitment to the owner, and can be tailored to the owner's desire. 
C) a right but not a commitment to the owner, and can be tailored to the owner's desire. 
D) a right but not a commitment to the owner, and are standardized. 
A) a commitment to the owner, and are standardized. 
B) a commitment to the owner, and can be tailored to the owner's desire. 
C) a right but not a commitment to the owner, and can be tailored to the owner's desire. 
D) a right but not a commitment to the owner, and are standardized.

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

Which of the following is the most unlikely 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)?

Accepted Answer

A) Purchase a call option on francs. 
B) Obtain a forward contract to purchase francs forward. 
C) Sell a futures contract on francs. 
D) All of the above are appropriate strategies for the scenario described. 
A) Purchase a call option on francs. 
B) Obtain a forward contract to purchase francs forward. 
C) Sell a futures contract on francs. 
D) All of the above are appropriate strategies for the scenario described.

If an actual put option premium is less than what is suggested by the put-call parity relationship, arbitrage can be conducted.

A currency put option is a contract specifying a standard volume of a particular currency to be exchanged on a specific settlement date.

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?

The annualized forward premium on the euro is 7 percent. What is the 90-day forward rate on the euro if the spot rate today is $1.25?

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

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?

Which of the following is true regarding options?

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.)

If an investor who has previously purchased a futures contract wishes to liquidate her position, she would sell an identical futures contract with the same settlement date.

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.

The lower bound of the call option premium is the greater of zero and the difference between the spot rate and the exercise price; the upper bound of a currency call option is the spot rate.

The premium on a pound put option is $.03 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.)

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

A straddle can only be achieved if the exercise prices of put and call options are the same.

Thornton, Inc. needs to invest 5 million Nepalese rupees in its Nepalese subsidiary to support local operations. Thornton would like its subsidiary to repay the rupees in one year. Thornton would like to engage in a swap transaction. Thus, Thornton would:

A forward rate for a currency is said to exhibit a discount if:

Currency futures contracts sold on an exchange contain:

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

Which of the following is the most unlikely 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)?

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 Cost of Capital and Capital Structure

Long-Term Debt Financing

Financing International Trade

Short-Term Financing

International Cash Management

Filters

Exam 5: Currency Derivatives

If an actual put option premium is less than what is suggested by the put-call parity relationship, arbitrage can be conducted.

A currency put option is a contract specifying a standard volume of a particular currency to be exchanged on a specific settlement date.

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?

The annualized forward premium on the euro is 7 percent. What is the 90-day forward rate on the euro if the spot rate today is $1.25?

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

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?

Which of the following is true regarding options?​

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.)​

If an investor who has previously purchased a futures contract wishes to liquidate her position, she would sell an identical futures contract with the same settlement date.

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.

The lower bound of the call option premium is the greater of zero and the difference between the spot rate and the exercise price; the upper bound of a currency call option is the spot rate.

The premium on a pound put option is $.03 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.)

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

A straddle can only be achieved if the exercise prices of put and call options are the same.

Thornton, Inc. needs to invest 5 million Nepalese rupees in its Nepalese subsidiary to support local operations. Thornton would like its subsidiary to repay the rupees in one year. Thornton would like to engage in a swap transaction. Thus, Thornton would:

A forward rate for a currency is said to exhibit a discount if:​

Currency futures contracts sold on an exchange contain:

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

Which of the following is the most unlikely 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)?

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 Cost of Capital and Capital Structure

Long-Term Debt Financing

Financing International Trade

Short-Term Financing

International Cash Management

Filters

Which of the following is true regarding options?

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.)

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.

The premium on a pound put option is $.03 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 forward rate for a currency is said to exhibit a discount if: