Question 1

Hedgers should buy puts if they are hedging an expected inflow of foreign currency.

Accepted Answer

A) True 
 B)False

Question 2

Forward contracts are usually liquidated by actual delivery of the currency, while futures contracts are usually liquidated by offsetting transactions.

Accepted Answer

A) True 
 B)False

Question 3

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 4

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 5

When the existing spot rate exceeds the exercise price, a call option is ____, and a put option is ____.

Accepted Answer

A)  out of the money; in the money 
B)  out of the money; out of the money 
C)  in the money; in the money 
D)  in the money; out of the money 
A)  out of the money; in the money 
B)  out of the money; out of the money 
C)  in the money; in the money 
D)  in the money; out of the money

Question 6

The highest amount a buyer of a call or a put option can lose is the exercise price.

Accepted Answer

A) True 
 B)False

Question 7

Forward contracts:

Accepted Answer

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

Question 8

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 9

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 10

A straddle is a speculative strategy that represents the purchase of both a call and a put.

Accepted Answer

A) True 
 B)False

Question 11

A European option can only be exercised at the expiration date, while an American option can be exercised any time prior to the expiration date.

Accepted Answer

A) True 
 B)False

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

Assume no transactions costs exist for any futures or forward contracts. The price of British pound futures with a settlement date 180 days from now will:

Accepted Answer

A)  definitely be above the 180-day forward rate. 
B)  definitely be below the 180-day forward rate. 
C)  be about the same as the 180-day forward rate. 
D)  none of the above; there is no relation between the futures and forward prices. 
A)  definitely be above the 180-day forward rate. 
B)  definitely be below the 180-day forward rate. 
C)  be about the same as the 180-day forward rate. 
D)  none of the above; there is no relation between the futures and forward prices.

Question 14

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 15

Frank is an option speculator. He anticipates the Danish kroner to appreciate from its current level of $.19 to $.21. Currently, kroner call options are available with an exercise price of $.18 and a premium of $.02. Should Frank attempt to buy this option? If the future spot rate of the Danish kroner is indeed $.21, what is his profit or loss per unit?

Accepted Answer

A)  no; -$0.01. 
B)  yes; $0.01. 
C)  yes; -$0.01. 
D)  yes; $0.03. 
A)  no; -$0.01. 
B)  yes; $0.01. 
C)  yes; -$0.01. 
D)  yes; $0.03.

Question 16

A call option on Australian dollars has a strike (exercise) price of $.56. The present exchange rate is $.59. This call 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 17

The spot rate for the Singapore dollar is $.588. The 30-day forward rate is $.590. The forward rate contains an annualized ____ of ____%.

Accepted Answer

A) discount; -4.07 
B) premium; 4.07 
C) discount; -4.08 
D) premium; 4.08 
E) premium; 3.40 
A) discount; -4.07 
B) premium; 4.07 
C) discount; -4.08 
D) premium; 4.08 
E) premium; 3.40

Question 18

A call option on Japanese yen has a strike (exercise) price of $.012. The present exchange rate is $.011. This call 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 19

Kalons, Inc. is a U.S.-based MNC that frequently imports raw materials from Canada. Kalons is typically invoiced for these goods in Canadian dollars and is concerned that the Canadian dollar will appreciate in the near future. Which of the following is not an appropriate hedging technique under these circumstances?

Accepted Answer

A)  purchase Canadian dollars forward. 
B)  purchase Canadian dollar futures contracts. 
C)  purchase Canadian dollar put options. 
D)  purchase Canadian dollar call options. 
A)  purchase Canadian dollars forward. 
B)  purchase Canadian dollar futures contracts. 
C)  purchase Canadian dollar put options. 
D)  purchase Canadian dollar call options.

Question 20

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

Hedgers should buy puts if they are hedging an expected inflow of foreign currency.

Forward contracts are usually liquidated by actual delivery of the currency, while futures contracts are usually liquidated by offsetting transactions.

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.

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

When the existing spot rate exceeds the exercise price, a call option is , and a put option is .

The highest amount a buyer of a call or a put option can lose is the exercise price.

Forward contracts:

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

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.

A straddle is a speculative strategy that represents the purchase of both a call and a put.

A European option can only be exercised at the expiration date, while an American option can be exercised any time prior to the expiration date.

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

Assume no transactions costs exist for any futures or forward contracts. The price of British pound futures with a settlement date 180 days from now will:

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

A call option on Australian dollars has a strike (exercise) price of $.56. The present exchange rate is $.59. This call option can be referred to as:

The spot rate for the Singapore dollar is $.588. The 30-day forward rate is $.590. The forward rate contains an annualized of %.

A call option on Japanese yen has a strike (exercise) price of $.012. The present exchange rate is $.011. This call option can be referred to as:

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.

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

Hedgers should buy puts if they are hedging an expected inflow of foreign currency.

Forward contracts are usually liquidated by actual delivery of the currency, while futures contracts are usually liquidated by offsetting transactions.

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.

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

When the existing spot rate exceeds the exercise price, a call option is ____, and a put option is ____.

The highest amount a buyer of a call or a put option can lose is the exercise price.

Forward contracts:

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

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.

A straddle is a speculative strategy that represents the purchase of both a call and a put.

A European option can only be exercised at the expiration date, while an American option can be exercised any time prior to the expiration date.

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

Assume no transactions costs exist for any futures or forward contracts. The price of British pound futures with a settlement date 180 days from now will:

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

A call option on Australian dollars has a strike (exercise) price of $.56. The present exchange rate is $.59. This call option can be referred to as:

The spot rate for the Singapore dollar is $.588. The 30-day forward rate is $.590. The forward rate contains an annualized ____ of ____%.

A call option on Japanese yen has a strike (exercise) price of $.012. The present exchange rate is $.011. This call option can be referred to as:

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.

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

When the existing spot rate exceeds the exercise price, a call option is , and a put option is .

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

The spot rate for the Singapore dollar is $.588. The 30-day forward rate is $.590. The forward rate contains an annualized of %.