Question 1

Other things equal, the price of an option goes up as the volatility of the option decreases.

Accepted Answer

A) True 
 B)False  False

Question 2

Foreign currency options are available both over-the-counter and on organized exchanges.

Accepted Answer

A) True 
 B)False  True

Question 3

Financial derivatives are powerful tools that can be used by management for purposes of

Accepted Answer

A) speculation. 
B) hedging. 
C) human resource management. 
D) A and B above. 
A) speculation. 
B) hedging. 
C) human resource management. 
D) A and B above. D

Question 4

The major difference between currency futures and forward contracts is that futures contracts are standardized for ease of trading on an exchange market whereas forward contracts are specialized and tailored to meet the needs of clients.

Accepted Answer

A) True 
 B)False

Question 5

The time value is asymmetric in value as you move away from the strike price. (i.e., the time value at two cents above the strike price is not necessarily the same as the time value two cents below the strike price.)

Accepted Answer

A) True 
 B)False

Question 6

Volatility cannot be directly observed for calculation purposes of the option pricing model. Therefore, it may be determined from

Accepted Answer

A) historic volatility. 
B) forward-looking volatility. 
C) implied volatility. 
D) any of the above 
A) historic volatility. 
B) forward-looking volatility. 
C) implied volatility. 
D) any of the above

Question 7

A call option whose exercise price is less than the spot price is said to be ________.

Accepted Answer

A) in-the-money 
B) at-the-money 
C) out-of-the-money 
D) under-the-spot 
A) in-the-money 
B) at-the-money 
C) out-of-the-money 
D) under-the-spot

Question 8

Which of the following is NOT true for the writer of a call option?

Accepted Answer

A) The maximum loss is unlimited. 
B) The maximum gain is unlimited. 
C) The gain or loss is equal to but of the opposite sign of the buyer of a call option. 
D) All of the above are true. 
A) The maximum loss is unlimited. 
B) The maximum gain is unlimited. 
C) The gain or loss is equal to but of the opposite sign of the buyer of a call option. 
D) All of the above are true.

Question 9

The buyer of a long put option

Accepted Answer

A) has a maximum loss equal to the premium paid. 
B) has a gain equal to but opposite in sign to the writer of the option. 
C) has maximum gain potential limited to the difference between the strike price and the premium paid. 
D) all of the above 
A) has a maximum loss equal to the premium paid. 
B) has a gain equal to but opposite in sign to the writer of the option. 
C) has maximum gain potential limited to the difference between the strike price and the premium paid. 
D) all of the above

Question 10

Why are foreign currency futures contracts more popular with individuals and banks while foreign currency forwards are more popular with businesses?

Accepted Answer

Foreign currency futures are standardize

Question 11

Peter Simpson thinks that the U.K. pound will cost $1.43/£ in six months. A 6-month currency futures contract is available today at a rate of $1.44/£. If Peter was to speculate in the currency futures market, and his expectations are correct, which of the following strategies would earn him a profit?

Accepted Answer

A) Sell a pound currency futures contract. 
B) Buy a pound currency futures contract. 
C) Sell pounds today. 
D) Sell pounds in six months. 
A) Sell a pound currency futures contract. 
B) Buy a pound currency futures contract. 
C) Sell pounds today. 
D) Sell pounds in six months.

Question 12

________ volatility are calculated by being backed out of the market option premium values traded.

Accepted Answer

A) Historic 
B) Forward-looking 
C) Implied 
D) none of the above 
A) Historic 
B) Forward-looking 
C) Implied 
D) none of the above

Question 13

The maximum gain for the purchaser of a call option contract is ________ while the maximum loss is ________.

Accepted Answer

A) unlimited; the premium paid. 
B) the premium paid; unlimited. 
C) unlimited; unlimited. 
D) unlimited; the value of the underlying asset. 
A) unlimited; the premium paid. 
B) the premium paid; unlimited. 
C) unlimited; unlimited. 
D) unlimited; the value of the underlying asset.

Question 14

The buyer of a long call option

Accepted Answer

A) has a maximum loss equal to the premium paid. 
B) has a gain equal to but opposite in sign to the writer of the option. 
C) has an unlimited maximum gain potential. 
D) all of the above 
A) has a maximum loss equal to the premium paid. 
B) has a gain equal to but opposite in sign to the writer of the option. 
C) has an unlimited maximum gain potential. 
D) all of the above

Question 15

A call option whose exercise price exceeds the spot price is said to be ________.

Accepted Answer

A) in-the-money 
B) at-the-money 
C) out-of-the-money 
D) over-the-spot 
A) in-the-money 
B) at-the-money 
C) out-of-the-money 
D) over-the-spot

Question 16

TABLE 8.1
Use the below mentioned table to answer following question(s).
April 19, 2009, British Pound Option Prices (cents per pound, 62,500 pound contracts).  
-Refer to Table 8.1. The exercise price of ________ giving the purchaser the right to sell pounds in June has a cost per pound of ________ for a total price of ________.

Accepted Answer

A) 1460; 0.68 cents; $425.00. 
B) 1440; 1.06 cents; $662.50. 
C) 1450; 1.02 cents; $637.50. 
D) 1440; 1.42 cents; $887.50. 
A) 1460; 0.68 cents; $425.00. 
B) 1440; 1.06 cents; $662.50. 
C) 1450; 1.02 cents; $637.50. 
D) 1440; 1.42 cents; $887.50.

Question 17

The writer of the option is referred to as the seller, and the buyer of the option is referred to as the holder.

Accepted Answer

A) True 
 B)False

Question 18

A foreign currency ________ contract calls for the future delivery of a standard amount of foreign exchange at a fixed time, place, and price.

Accepted Answer

A) futures 
B) forward 
C) option 
D) swap 
A) futures 
B) forward 
C) option 
D) swap

Question 19

Andrea Cujoli is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ and the 6-month forward rate is ¥128.53/$. Andrea thinks the yen will move to ¥128.00/$ in the next six months. If Andrea's expectations are correct, then she could profit in the forward market by ________ and then ________.

Accepted Answer

A) buying yen for ¥128.00/$; selling yen at ¥128.53/$ 
B) buying yen for ¥128.53/$; selling yen at ¥128.00/$ 
C) There is not enough information to answer this question 
D) She could not profit in the forward market. 
A) buying yen for ¥128.00/$; selling yen at ¥128.53/$ 
B) buying yen for ¥128.53/$; selling yen at ¥128.00/$ 
C) There is not enough information to answer this question 
D) She could not profit in the forward market.

Question 20

A call option on euros is written with a strike price of $1.30/euro. Which spot price maximizes your profit if you choose to exercise the option before maturity?

Accepted Answer

A) $1.20/euro 
B) $1.25/euro 
C) $1.30/euro 
D) $1.35/euro 
A) $1.20/euro 
B) $1.25/euro 
C) $1.30/euro 
D) $1.35/euro

Other things equal, the price of an option goes up as the volatility of the option decreases.

Foreign currency options are available both over-the-counter and on organized exchanges.

Financial derivatives are powerful tools that can be used by management for purposes of

The major difference between currency futures and forward contracts is that futures contracts are standardized for ease of trading on an exchange market whereas forward contracts are specialized and tailored to meet the needs of clients.

The time value is asymmetric in value as you move away from the strike price. (i.e., the time value at two cents above the strike price is not necessarily the same as the time value two cents below the strike price.)

Volatility cannot be directly observed for calculation purposes of the option pricing model. Therefore, it may be determined from

A call option whose exercise price is less than the spot price is said to be ________.

Which of the following is NOT true for the writer of a call option?

The buyer of a long put option

Why are foreign currency futures contracts more popular with individuals and banks while foreign currency forwards are more popular with businesses?

________ volatility are calculated by being backed out of the market option premium values traded.

The maximum gain for the purchaser of a call option contract is while the maximum loss is .

The buyer of a long call option

A call option whose exercise price exceeds the spot price is said to be ________.

The writer of the option is referred to as the seller, and the buyer of the option is referred to as the holder.

A foreign currency ________ contract calls for the future delivery of a standard amount of foreign exchange at a fixed time, place, and price.

A call option on euros is written with a strike price of $1.30/euro. Which spot price maximizes your profit if you choose to exercise the option before maturity?

Globalization and the Multinational Enterprise

Financial Goals and Corporate Governance

The International Monetary System

The Balance of Payments

Current Multinational Financial Challenges: the Credit Crisis of 2007-2009

The Foreign Exchange Market

International Parity Conditions

Interest Rate and Currency Swaps

Foreign Exchange Rate Determination and Forecasting

Transaction Exposure

Operating Exposure

Translation Exposure

The Global Cost and Availability of Capital

Sourcing Equity Globally

Sourcing Debt Globally

International Portfolio Theory and Diversification

Foreign Direct Investment Theory and Political Risk

Multinational Capital Budgeting

Multinational Tax Management

Working Capital Management

International Trade Finance

Filters

Exam 8: Foreign Currency Derivatives

Other things equal, the price of an option goes up as the volatility of the option decreases.

Foreign currency options are available both over-the-counter and on organized exchanges.

Financial derivatives are powerful tools that can be used by management for purposes of

The major difference between currency futures and forward contracts is that futures contracts are standardized for ease of trading on an exchange market whereas forward contracts are specialized and tailored to meet the needs of clients.

The time value is asymmetric in value as you move away from the strike price. (i.e., the time value at two cents above the strike price is not necessarily the same as the time value two cents below the strike price.)

Volatility cannot be directly observed for calculation purposes of the option pricing model. Therefore, it may be determined from

A call option whose exercise price is less than the spot price is said to be ________.

Which of the following is NOT true for the writer of a call option?

The buyer of a long put option

Why are foreign currency futures contracts more popular with individuals and banks while foreign currency forwards are more popular with businesses?

________ volatility are calculated by being backed out of the market option premium values traded.

The maximum gain for the purchaser of a call option contract is ________ while the maximum loss is ________.

The buyer of a long call option

A call option whose exercise price exceeds the spot price is said to be ________.

The writer of the option is referred to as the seller, and the buyer of the option is referred to as the holder.

A foreign currency ________ contract calls for the future delivery of a standard amount of foreign exchange at a fixed time, place, and price.

A call option on euros is written with a strike price of $1.30/euro. Which spot price maximizes your profit if you choose to exercise the option before maturity?

Globalization and the Multinational Enterprise

Financial Goals and Corporate Governance

The International Monetary System

The Balance of Payments

Current Multinational Financial Challenges: the Credit Crisis of 2007-2009

The Foreign Exchange Market

International Parity Conditions

Interest Rate and Currency Swaps

Foreign Exchange Rate Determination and Forecasting

Transaction Exposure

Operating Exposure

Translation Exposure

The Global Cost and Availability of Capital

Sourcing Equity Globally

Sourcing Debt Globally

International Portfolio Theory and Diversification

Foreign Direct Investment Theory and Political Risk

Multinational Capital Budgeting

Multinational Tax Management

Working Capital Management

International Trade Finance

Filters

The maximum gain for the purchaser of a call option contract is while the maximum loss is .