Question 1

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 2

Which of the following would result in a profit of a futures contract when the underlying currency depreciates?

Accepted Answer

A)  Buy a futures contract; sell a futures contract after the currency has depreciated 
B)  Sell a futures contract; buy a futures contract after the currency has depreciated 
C)  Buy a futures contract; buy an additional futures contract after the currency has depreciated 
D)  None of the above would result in a profit when the underlying currency of the futures contract depreciates. 
A)  Buy a futures contract; sell a futures contract after the currency has depreciated 
B)  Sell a futures contract; buy a futures contract after the currency has depreciated 
C)  Buy a futures contract; buy an additional futures contract after the currency has depreciated 
D)  None of the above would result in a profit when the underlying currency of the futures contract depreciates.

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

Which of the following is true?

Accepted Answer

A)  The futures market is primarily used by speculators while the forward market is primarily used for hedging. 
B)  The futures market is primarily used for hedging while the forward market is primarily used for speculating. 
C)  The futures market and the forward market are primarily used for speculating. 
D)  The futures market and the forward market are primarily used for hedging. 
A)  The futures market is primarily used by speculators while the forward market is primarily used for hedging. 
B)  The futures market is primarily used for hedging while the forward market is primarily used for speculating. 
C)  The futures market and the forward market are primarily used for speculating. 
D)  The futures market and the forward market are primarily used for hedging.

Question 5

If a currency's forward rate exhibits a premium, that currency is forced to depreciate.

Accepted Answer

A) True 
 B)False

Question 6

When the futures price on euros is below the forward rate on euros for the same settlement date, astute investors may attempt to simultaneously ____ euros forward and ____ euro futures.

Accepted Answer

A)  sell; sell 
B)  buy; sell 
C)  sell; buy 
D)  buy; buy 
A)  sell; sell 
B)  buy; sell 
C)  sell; buy 
D)  buy; buy

Question 7

Which of the following is true of options?

Accepted Answer

A)  The writer decides whether the option will be exercised. 
B)  The writer pays the buyer the option premium. 
C)  The buyer decides if the option will be exercised. 
D)  More than one of these. 
A)  The writer decides whether the option will be exercised. 
B)  The writer pays the buyer the option premium. 
C)  The buyer decides if the option will be exercised. 
D)  More than one of these.

Question 8

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 9

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 10

Which of the following is not true regarding options?

Accepted Answer

A)  Options are traded on exchanges, never over-the-counter. 
B)  Similar to futures contracts, margin requirements are normally imposed on option traders. 
C)  Although commissions for options are fixed per transaction, multiple contracts may be involved in a transaction, thus lowering the commission per contract. 
D)  Currency options can be classified as either put or call options. 
E)  All of the above are true. 
A)  Options are traded on exchanges, never over-the-counter. 
B)  Similar to futures contracts, margin requirements are normally imposed on option traders. 
C)  Although commissions for options are fixed per transaction, multiple contracts may be involved in a transaction, thus lowering the commission per contract. 
D)  Currency options can be classified as either put or call options. 
E)  All of the above are true.

Question 11

If you have bought a right to buy foreign currency, you are:

Accepted Answer

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

Question 12

Which of the following is correct?

Accepted Answer

A)  The longer the time to maturity, the less the value of a currency call option, other things equal. 
B)  The longer the time to maturity, the less the value of a currency put option, other things equal. 
C)  The higher the spot rate relative to the exercise price, the greater the value of a currency put option, other things equal. 
D)  The lower the exercise price relative to the spot rate, the greater the value of a currency call option, other things equal. 
A)  The longer the time to maturity, the less the value of a currency call option, other things equal. 
B)  The longer the time to maturity, the less the value of a currency put option, other things equal. 
C)  The higher the spot rate relative to the exercise price, the greater the value of a currency put option, other things equal. 
D)  The lower the exercise price relative to the spot rate, the greater the value of a currency call option, other things equal.

Question 13

Crown Co. is expecting to receive 100,000 British pounds in one year. Crown expects the spot rate of British pound to be $1.49 in a year, so it decides to avoid exchange rate risk by hedging its receivables. The spot rate of the pound is quoted at $1.51. The strike price of put and call options are $1.54 and $1.53 respectively. The premium on both options is $.03. The one-year forward rate exhibits a 2.65% premium. Assume there are no transaction costs. What is the best possible hedging strategy and how many U.S. dollars Crown Co. will receive under this strategy?

Accepted Answer

A)  buy a put option and receive $150,000. 
B)  sell pounds forward and receive $155,000. 
C)  sell a call option and receive $156,000. 
D)  sell a put option and receive $157,000. 
A)  buy a put option and receive $150,000. 
B)  sell pounds forward and receive $155,000. 
C)  sell a call option and receive $156,000. 
D)  sell a put option and receive $157,000.

Question 14

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 15

The premium on a euro call option is $.02. The exercise price is $1.32. The break-even point is ____ for the buyer of the call, and ____ for the seller of the call. (Assume zero transactions costs and that the buyer and seller of the put option are speculators.)

Accepted Answer

A)  $1.30; $1.30 
B)  $1.34; $1.30 
C)  $1.30; $1.34 
D)  $1.34; $1.34 
A)  $1.30; $1.30 
B)  $1.34; $1.30 
C)  $1.30; $1.34 
D)  $1.34; $1.34

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

As mentioned in the text, the most common maturities for forward rates are:

Accepted Answer

A)  one, three, six, and twelve months. 
B)  one, three, six, and twelve years. 
C)  two, three, and five years. 
D)  two, three, and five weeks. 
A)  one, three, six, and twelve months. 
B)  one, three, six, and twelve years. 
C)  two, three, and five years. 
D)  two, three, and five weeks.

Question 18

When the futures price is equal to the spot rate of a given currency, and the foreign country exhibits a higher interest rate than the U.S. interest rate, astute investors may attempt to simultaneously ____ the foreign currency, invest it in the foreign country, and ____ futures in the foreign currency.

Accepted Answer

A)  buy; buy 
B)  sell; buy 
C)  buy; sell 
D)  buy ; buy 
A)  buy; buy 
B)  sell; buy 
C)  buy; sell 
D)  buy ; buy

Question 19

An MNC frequently uses either forward or futures contracts to hedge its exposure to foreign receivables. To do so, the MNC can either sell the foreign currency forward or sell futures.

Accepted Answer

A) True 
 B)False

Question 20

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.

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

Which of the following would result in a profit of a futures contract when the underlying currency depreciates?

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)?

Which of the following is true?

If a currency's forward rate exhibits a premium, that currency is forced to depreciate.

When the futures price on euros is below the forward rate on euros for the same settlement date, astute investors may attempt to simultaneously euros forward and euro futures.

Which of the following is true of options?

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

Which of the following is not true regarding options?

If you have bought a right to buy foreign currency, you are:

Which of the following is correct?

The premium on a euro call option is $.02. The exercise price is $1.32. The break-even point is for the buyer of the call, and for the seller of the call. (Assume zero transactions costs and that the buyer and seller of the put option are speculators.)

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

As mentioned in the text, the most common maturities for forward rates are:

When the futures price is equal to the spot rate of a given currency, and the foreign country exhibits a higher interest rate than the U.S. interest rate, astute investors may attempt to simultaneously the foreign currency, invest it in the foreign country, and futures in the foreign currency.

An MNC frequently uses either forward or futures contracts to hedge its exposure to foreign receivables. To do so, the MNC can either sell the foreign currency forward or sell futures.

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

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

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Exam 5: Currency Derivatives

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

Which of the following would result in a profit of a futures contract when the underlying currency depreciates?

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)?

Which of the following is true?

If a currency's forward rate exhibits a premium, that currency is forced to depreciate.

When the futures price on euros is below the forward rate on euros for the same settlement date, astute investors may attempt to simultaneously ____ euros forward and ____ euro futures.

Which of the following is true of options?

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

Which of the following is not true regarding options?

If you have bought a right to buy foreign currency, you are:

Which of the following is correct?

The premium on a euro call option is $.02. The exercise price is $1.32. The break-even point is ____ for the buyer of the call, and ____ for the seller of the call. (Assume zero transactions costs and that the buyer and seller of the put option are speculators.)

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

As mentioned in the text, the most common maturities for forward rates are:

An MNC frequently uses either forward or futures contracts to hedge its exposure to foreign receivables. To do so, the MNC can either sell the foreign currency forward or sell futures.

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

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 futures price on euros is below the forward rate on euros for the same settlement date, astute investors may attempt to simultaneously euros forward and euro futures.

The premium on a euro call option is $.02. The exercise price is $1.32. The break-even point is for the buyer of the call, and for the seller of the call. (Assume zero transactions costs and that the buyer and seller of the put option are speculators.)