Question 1

Which of the following is true regarding the options markets?

Accepted Answer

A)  Hedgers and speculators both attempt to lower risk. 
B)  Hedgers attempt to lower risk, while speculators attempt to make riskless profits. 
C)  Hedgers and speculators are both necessary in order for the market to be liquid. 
D)  all of the above 
A)  Hedgers and speculators both attempt to lower risk. 
B)  Hedgers attempt to lower risk, while speculators attempt to make riskless profits. 
C)  Hedgers and speculators are both necessary in order for the market to be liquid. 
D)  all of the above

Question 2

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.

Question 3

Both call and put option premiums are affected by the level of the existing spot price relative to the strike price; for example, a high spot price relative to the strike price will result in a relatively high premium for a call option but a relatively low premium for a put option.

Accepted Answer

A) True 
 B)False

Question 4

The 90-day forward rate for the euro is $1.07, while the current spot rate of the euro is $1.05. What is the annualized forward premium or discount of the euro?

Accepted Answer

A)  1.9 percent discount. 
B)  1.9 percent premium. 
C)  7.6 percent premium. 
D)  7.6 percent discount. 
A)  1.9 percent discount. 
B)  1.9 percent premium. 
C)  7.6 percent premium. 
D)  7.6 percent discount.

Question 5

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 6

It is possible to have an opportunity loss when using futures to hedge.

Accepted Answer

A) True 
 B)False

Question 7

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 8

The spot rate of euro is quoted at $1.29. The annualized forward premium on the euro is 10%. What is the 30-day forward rate of the euro?

Accepted Answer

A)  $1.28 
B)  $1.30 
C)  $1.42 
D)  $1.16 
A)  $1.28 
B)  $1.30 
C)  $1.42 
D)  $1.16

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

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 11

Which of the following is true for futures, but not for forwards?

Accepted Answer

A)  actual delivery. 
B)  no transactions costs. 
C)  self regulation. 
D) none of the above 
A)  actual delivery. 
B)  no transactions costs. 
C)  self regulation. 
D) none of the above

Question 12

A put option on British pounds has a strike (exercise) price of $1.48. The present exchange rate is $1.55. This put option can be referred to as:

Accepted Answer

A)  in the money. 
B)  out of the money. 
C)  at the money. 
D)  at a discount. 
A)  in the money. 
B)  out of the money. 
C)  at the money. 
D)  at a discount.

Question 13

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

Accepted Answer

A)  selling; buying; buying 
B)  buying; selling; buying 
C)  selling; buying; selling 
D)  buying; buying; buying 
A)  selling; buying; buying 
B)  buying; selling; buying 
C)  selling; buying; selling 
D)  buying; buying; buying

Question 14

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 15

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

Accepted Answer

A) True 
 B)False

Question 16

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 17

Options can be traded on an exchange or over the counter.

Accepted Answer

A) True 
 B)False

Question 18

Assume the spot rate of a currency is $.37 and the 90-day forward rate is $.36. The forward rate of this currency exhibits a ____ of ____ on an annualized basis.

Accepted Answer

A)  discount; 11.11% 
B)  premium; 11.11% 
C)  premium; 10.81% 
D)  discount; 10.81% 
A)  discount; 11.11% 
B)  premium; 11.11% 
C)  premium; 10.81% 
D)  discount; 10.81%

Question 19

When currency options are not standardized and traded over-the-counter, there is ____ liquidity and a ____ bid/ask spread.

Accepted Answer

A)  less; narrower 
B)  more; narrower 
C)  more; wider 
D)  less; wider 
A)  less; narrower 
B)  more; narrower 
C)  more; wider 
D)  less; wider

Question 20

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

Accepted Answer

A)  selling; buying; buying 
B)  buying; selling; buying 
C)  selling; buying; selling 
D)  buying; buying; buying 
A)  selling; buying; buying 
B)  buying; selling; buying 
C)  selling; buying; selling 
D)  buying; buying; buying

Which of the following is true regarding the options markets?

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

Both call and put option premiums are affected by the level of the existing spot price relative to the strike price; for example, a high spot price relative to the strike price will result in a relatively high premium for a call option but a relatively low premium for a put option.

The 90-day forward rate for the euro is $1.07, while the current spot rate of the euro is $1.05. What is the annualized forward premium or discount of the euro?

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

It is possible to have an opportunity loss when using futures to hedge.

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

The spot rate of euro is quoted at $1.29. The annualized forward premium on the euro is 10%. What is the 30-day forward rate of the euro?

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

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 true for futures, but not for forwards?

A put option on British pounds has a strike (exercise) price of $1.48. The present exchange rate is $1.55. This put option can be referred to as:

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

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

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

Options can be traded on an exchange or over the counter.

Assume the spot rate of a currency is $.37 and the 90-day forward rate is $.36. The forward rate of this currency exhibits a of on an annualized basis.

When currency options are not standardized and traded over-the-counter, there is liquidity and a bid/ask spread.

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

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

Which of the following is true regarding the options markets?

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

Both call and put option premiums are affected by the level of the existing spot price relative to the strike price; for example, a high spot price relative to the strike price will result in a relatively high premium for a call option but a relatively low premium for a put option.

The 90-day forward rate for the euro is $1.07, while the current spot rate of the euro is $1.05. What is the annualized forward premium or discount of the euro?

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

It is possible to have an opportunity loss when using futures to hedge.

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

The spot rate of euro is quoted at $1.29. The annualized forward premium on the euro is 10%. What is the 30-day forward rate of the euro?

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

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 true for futures, but not for forwards?

A put option on British pounds has a strike (exercise) price of $1.48. The present exchange rate is $1.55. This put option can be referred to as:

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

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

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

Options can be traded on an exchange or over the counter.

Assume the spot rate of a currency is $.37 and the 90-day forward rate is $.36. The forward rate of this currency exhibits a ____ of ____ on an annualized basis.

When currency options are not standardized and traded over-the-counter, there is ____ liquidity and a ____ bid/ask spread.

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

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.

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

Assume the spot rate of a currency is $.37 and the 90-day forward rate is $.36. The forward rate of this currency exhibits a of on an annualized basis.

When currency options are not standardized and traded over-the-counter, there is liquidity and a bid/ask spread.

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