Question 1

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 2

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:

Accepted Answer

A) $1,562.50. 
B) -$1,562.50. 
C) -$1,250.00. 
D) -$625.00. 
A) $1,562.50. 
B) -$1,562.50. 
C) -$1,250.00. 
D) -$625.00.

Question 3

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)?

Accepted Answer

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. 
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.

Question 4

You are a speculator who sells a put option on Canadian dollars for a premium of $.03 per unit, with an exercise price of $.86. The option will not be exercised until the expiration date, if at all. If the spot rate of the Canadian dollar is $.78 on the expiration date, your net profit per unit is:

Accepted Answer

A) -$.08. 
B) -$.03. 
C) $.05. 
D) $.08. 
E) none of the above 
A) -$.08. 
B) -$.03. 
C) $.05. 
D) $.08. 
E) none of the above

Question 5

The currency futures markets are regulated by the International Monetary Fund.

Accepted Answer

A) True 
 B)False

Question 6

An option writer is the seller of a call or a put option.

Accepted Answer

A) True 
 B)False

Question 7

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 the above 
A) pay; 20,000 
B) be paid; 20,000 
C) pay; 2,000 
D) be paid; 2,000 
E) none of the above

Question 8

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

Accepted Answer

A) True 
B) False 
A) True 
B) False

Question 9

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:

Accepted Answer

A) selling futures in francs. 
B) buying futures in francs. 
C) buying franc put options. 
D) buying franc call options. 
A) selling futures in francs. 
B) buying futures in francs. 
C) buying franc put options. 
D) buying franc call options.

Question 10

If a currency's forward rate exhibits a discount, the currency is forced to appreciate.

Accepted Answer

A) True 
 B)False

Question 11

If you have an options position in which you might be obligated to buy euros, you are a:

Accepted Answer

A) call writer. 
B) put writer. 
C) put buyer. 
D) futures seller. 
A) call writer. 
B) put writer. 
C) put buyer. 
D) futures seller.

Question 12

Forward contracts are the best technique for managing exposure arising from project bidding.

Accepted Answer

A) True 
 B)False

Question 13

If an investor who previously sold futures contracts wishes to liquidate his position, he could sell futures contracts with the same maturity date.

Accepted Answer

A) True 
 B)False

Question 14

In the United States, the typical currency futures contract is based on a currency value in terms of:

Accepted Answer

A) euros. 
B) U.S. dollars. 
C) British pounds. 
D) Canadian dollars. 
A) euros. 
B) U.S. dollars. 
C) British pounds. 
D) Canadian dollars.

Question 15

Currency call options allow the purchaser to lock in the price paid for a currency. Therefore, they are oFten used by MNCs to hedge foreign currency payables.

Accepted Answer

A) True 
 B)False

Question 16

The ____ the existing spot price relative to the strike price, the ____ valuable the call options will be.

Accepted Answer

A) higher; less 
B) higher; more 
C) lower; less 
D) lower; more 
A) higher; less 
B) higher; more 
C) lower; less 
D) lower; more

Question 17

If a currency put option is out of the money, then the present exchange rate is less than the strike price.

Accepted Answer

A) True 
 B)False

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

When a currency call option is classified as "in the money," this indicates that

Accepted Answer

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 
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

Question 20

If you have bought the right to sell, you are a:

Accepted Answer

A) call writer. 
B) put buyer. 
C) futures buyer. 
D) put writer. 
A) call writer. 
B) put buyer. 
C) futures buyer. 
D) put writer.

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.

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)?

You are a speculator who sells a put option on Canadian dollars for a premium of $.03 per unit, with an exercise price of $.86. The option will not be exercised until the expiration date, if at all. If the spot rate of the Canadian dollar is $.78 on the expiration date, your net profit per unit is:

The currency futures markets are regulated by the International Monetary Fund.

An option writer is the seller of a call or a put option.

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

If a currency's forward rate exhibits a discount, the currency is forced to appreciate.

If you have an options position in which you might be obligated to buy euros, you are a:

Forward contracts are the best technique for managing exposure arising from project bidding.

If an investor who previously sold futures contracts wishes to liquidate his position, he could sell futures contracts with the same maturity date.

In the United States, the typical currency futures contract is based on a currency value in terms of:

Currency call options allow the purchaser to lock in the price paid for a currency. Therefore, they are oFten used by MNCs to hedge foreign currency payables.

The the existing spot price relative to the strike price, the valuable the call options will be.

If a currency put option is out of the money, then the present exchange rate is less than the strike price.

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

When a currency call option is classified as "in the money," this indicates that

If you have bought the right to sell, you are a:

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 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.

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)?

You are a speculator who sells a put option on Canadian dollars for a premium of $.03 per unit, with an exercise price of $.86. The option will not be exercised until the expiration date, if at all. If the spot rate of the Canadian dollar is $.78 on the expiration date, your net profit per unit is:

The currency futures markets are regulated by the International Monetary Fund.

An option writer is the seller of a call or a put option.

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

If a currency's forward rate exhibits a discount, the currency is forced to appreciate.

If you have an options position in which you might be obligated to buy euros, you are a:

Forward contracts are the best technique for managing exposure arising from project bidding.

If an investor who previously sold futures contracts wishes to liquidate his position, he could sell futures contracts with the same maturity date.

In the United States, the typical currency futures contract is based on a currency value in terms of:

Currency call options allow the purchaser to lock in the price paid for a currency. Therefore, they are oFten used by MNCs to hedge foreign currency payables.

The ____ the existing spot price relative to the strike price, the ____ valuable the call options will be.

If a currency put option is out of the money, then the present exchange rate is less than the strike price.

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

When a currency call option is classified as "in the money," this indicates that

If you have bought the right to sell, you are a:

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

The the existing spot price relative to the strike price, the valuable the call options will be.

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