Question 1

Conditional currency options are:

Accepted Answer

A)  options that do not require premiums. 
B)  options where the premiums are canceled if a trigger level is reached. 
C)  options that allow the buyer to decide what currency the option will be settled in. 
D)  none of the above 
A)  options that do not require premiums. 
B)  options where the premiums are canceled if a trigger level is reached. 
C)  options that allow the buyer to decide what currency the option will be settled in. 
D)  none of the above

Question 2

A call option premium has a lower bound that is equal to the greater of zero and the difference between the underlying ____ prices. The upper bound of a call option premium is the ____ price.

Accepted Answer

A)  spot and exercise; exercise 
B)  spot and exercise; spot 
C)  exercise and spot; exercise 
D)  exercise and spot; spot 
A)  spot and exercise; exercise 
B)  spot and exercise; spot 
C)  exercise and spot; exercise 
D)  exercise and spot; spot

Question 3

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 4

Which of the following is not an instrument used by U.S.-based MNCs to cover their foreign currency positions?

Accepted Answer

A)  forward contracts. 
B)  futures contracts. 
C)  non-deliverable forward contracts. 
D)  options. 
E)  all of the above are instruments used to cover foreign currency positions. 
A)  forward contracts. 
B)  futures contracts. 
C)  non-deliverable forward contracts. 
D)  options. 
E)  all of the above are instruments used to cover foreign currency positions.

Question 5

A straddle represents the purchase of either two call or two put options at the same exercise price.

Accepted Answer

A) True 
 B)False

Question 6

Non-deliverable forward contracts (NDFs) are frequently used for currencies in emerging markets.

Accepted Answer

A) True 
 B)False

Question 7

If the futures rate is lower than the forward rate, astute investors would attempt to simultaneously buy futures and sell forward. Such actions would place downward pressure on the futures price and upward pressure on the forward rate.

Accepted Answer

A) True 
 B)False

Question 8

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 9

You purchase a call option on pounds for a premium of $.03 per unit, with an exercise price of $1.64; the option will not be exercised until the expiration date, if at all. If the spot rate on the expiration date is $1.65, your net profit per unit is:

Accepted Answer

A)  -$.03. 
B)  -$.02. 
C)  -$.01. 
D)  $.02. 
E)  none of the above 
A)  -$.03. 
B)  -$.02. 
C)  -$.01. 
D)  $.02. 
E)  none of the above

Question 10

Which of the following is not true regarding options?

Accepted Answer

A)  The buyer of a call option has the right to buy the currency at the strike price. 
B)  The writer of a call option has the obligation to sell the currency to the buyer if the option if exercised. 
C)  The buyer of a put option has the right to sell the currency at the strike price. 
D)  The writer of a put option has the obligation to sell the currency to the buyer if the option is exercised. 
A)  The buyer of a call option has the right to buy the currency at the strike price. 
B)  The writer of a call option has the obligation to sell the currency to the buyer if the option if exercised. 
C)  The buyer of a put option has the right to sell the currency at the strike price. 
D)  The writer of a put option has the obligation to sell the currency to the buyer if the option is exercised.

Question 11

Assume that the British pound (£) futures price for September is $1.60. Given that 62,500 units are in a British pound futures contract, the seller of British pound futures will receive $____ on the delivery date.

Accepted Answer

A)  39,062.50 
B)  100,000 
C)  48,000 
D)  87,062.50 
A)  39,062.50 
B)  100,000 
C)  48,000 
D)  87,062.50

Question 12

Margin is used in the forward market to mitigate default risk.

Accepted Answer

A) True 
 B)False

Question 13

The annualized forward premium on the euro is 7%. 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 14

If the spot rate of the euro increased substantially over a one-month period, the futures price on euros would likely ____ over that same period.

Accepted Answer

A)  increase slightly 
B)  decrease substantially 
C)  increase substantially 
D)  stay the same 
A)  increase slightly 
B)  decrease substantially 
C)  increase substantially 
D)  stay the same

Question 15

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.

Question 16

J&L Co. is a U.S.-based MNC that frequently exports computers to Italy. J&L typically invoices these goods in euros and is concerned that the euro will depreciate in the near future. Which of the following is not an appropriate technique under these circumstances?

Accepted Answer

A)  purchase euro put options. 
B)  sell euros forward. 
C)  sell euro futures contracts. 
D)  sell euro put options. 
A)  purchase euro put options. 
B)  sell euros forward. 
C)  sell euro futures contracts. 
D)  sell euro put options.

Question 17

A U.S. corporation has purchased currency call options to hedge a 70,000 pound (£) payable. The premium is $0.02 and the exercise price of the option is $0.50. If the spot rate at the time of maturity is $0.65, 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 18

Currency options are commonly traded through the ____ system.

Accepted Answer

A)  robot 
B)  Euro 
C)  GLOBEX 
D)  Scope 
A)  robot 
B)  Euro 
C)  GLOBEX 
D)  Scope

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

In the U.S., 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.

Exam 5: Currency Derivatives

Conditional currency options are:

A call option premium has a lower bound that is equal to the greater of zero and the difference between the underlying ____ prices. The upper bound of a call option premium is the ____ price.

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

Which of the following is not an instrument used by U.S.-based MNCs to cover their foreign currency positions?

A straddle represents the purchase of either two call or two put options at the same exercise price.

Non-deliverable forward contracts (NDFs) are frequently used for currencies in emerging markets.

If the futures rate is lower than the forward rate, astute investors would attempt to simultaneously buy futures and sell forward. Such actions would place downward pressure on the futures price and upward pressure on the forward rate.

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

You purchase a call option on pounds for a premium of $.03 per unit, with an exercise price of $1.64; the option will not be exercised until the expiration date, if at all. If the spot rate on the expiration date is $1.65, your net profit per unit is:

Which of the following is not true regarding options?

Assume that the British pound (£) futures price for September is $1.60. Given that 62,500 units are in a British pound futures contract, the seller of British pound futures will receive $____ on the delivery date.

Margin is used in the forward market to mitigate default risk.

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

If the spot rate of the euro increased substantially over a one-month period, the futures price on euros would likely ____ over that same period.

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)?

J&L Co. is a U.S.-based MNC that frequently exports computers to Italy. J&L typically invoices these goods in euros and is concerned that the euro will depreciate in the near future. Which of the following is not an appropriate technique under these circumstances?

A U.S. corporation has purchased currency call options to hedge a 70,000 pound (£) payable. The premium is $0.02 and the exercise price of the option is $0.50. If the spot rate at the time of maturity is $0.65, what is the total amount paid by the corporation if it acts rationally?

Currency options are commonly traded through the ____ system.

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

In the U.S., the typical currency futures contract is based on a currency value in terms of:

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

A call option premium has a lower bound that is equal to the greater of zero and the difference between the underlying prices. The upper bound of a call option premium is the price.