Question 1

The writer of a call option is obligated to sell the underlying currency to the buyer of the option if the option is exercised.

Accepted Answer

A) True 
 B)False

Question 2

Due to put-call parity, we can use the same formula to price calls and puts.

Accepted Answer

A) True 
 B)False

Question 3

The price of a futures contract will generally vary significantly from that of a forward contract.

Accepted Answer

A) True 
 B)False

Question 4

The ____ the existing spot price relative to the strike price, the ____ valuable the put 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 5

Which of the following is not true regarding futures contracts?

Accepted Answer

A)  Unlike forward contracts, they are generally traded on an exchange. 
B)  Futures contracts are standardized with respect to delivery date and size of the contract. 
C)  There is an active over-the-counter market for currency futures contracts. 
D)  Currency futures can be used by speculators who attempt to profit from exchange rate movements. 
A)  Unlike forward contracts, they are generally traded on an exchange. 
B)  Futures contracts are standardized with respect to delivery date and size of the contract. 
C)  There is an active over-the-counter market for currency futures contracts. 
D)  Currency futures can be used by speculators who attempt to profit from exchange rate movements.

Question 6

An advantage of a short straddle is that it provides the option writer with income from two separate sources.

Accepted Answer

A) True 
 B)False

Question 7

The purchase of a currency put option would be appropriate for which of the following?

Accepted Answer

A)  Investors who expect to buy a foreign bond in one month. 
B)  Corporations who expect to buy foreign currency to finance foreign subsidiaries. 
C)  Corporations who expect to collect on a foreign account receivable in one month. 
D)  all of the above 
A)  Investors who expect to buy a foreign bond in one month. 
B)  Corporations who expect to buy foreign currency to finance foreign subsidiaries. 
C)  Corporations who expect to collect on a foreign account receivable in one month. 
D)  all of the above

Question 8

Currency futures contracts sold on an exchange:

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 9

A put 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 10

The premium of a currency put option will increase if:

Accepted Answer

A)  the volatility of the underlying asset goes up. 
B)  the time to maturity goes up. 
C)  the spot rate declines. 
D)  none of the above 
A)  the volatility of the underlying asset goes up. 
B)  the time to maturity goes up. 
C)  the spot rate declines. 
D)  none of the above

Question 11

Managers of MNCs are typically expected to use currency derivatives for speculation in order to improve profits.

Accepted Answer

A) True 
 B)False

Question 12

You are a speculator who sells a call option on Swiss francs for a premium of $.06, with an exercise price of $.64. The option will not be exercised until the expiration date, if at all. If the spot rate of the Swiss franc is $.69 on the expiration date, your net profit per unit, assuming that you have to buy Swiss francs in the market to fulfill your obligation, is:

Accepted Answer

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

Question 13

American style options can be exercised any time up to maturity.

Accepted Answer

A) True 
 B)False

Question 14

Margin requirements are deposits placed by investors in futures contracts with their respective brokerage firms when they take their position. They are intended to minimize credit risk associated with futures contracts.

Accepted Answer

A) True 
 B)False

Question 15

If an actual put option premium is less than what is suggested by the put-call parity relationship, arbitrage can be conducted.

Accepted Answer

A) True 
 B)False

Question 16

Futures contracts are standardized with respect to delivery date and the futures price specified for the settlement date.

Accepted Answer

A) True 
 B)False

Question 17

Futures and options are available for crossrates.

Accepted Answer

A) True 
 B)False

Question 18

Assume that a currency's spot and future prices are the same, and the currency's interest rate is higher than the U.S. rate. The actions of U.S. investors to lock in this higher foreign return would ____ the currency's spot rate and ____ the currency's futures price.

Accepted Answer

A)  put upward pressure on; put upward pressure on 
B)  put downward pressure on; put upward pressure on 
C)  put upward pressure on; put downward pressure on 
D)  put downward pressure on; put downward pressure on 
A)  put upward pressure on; put upward pressure on 
B)  put downward pressure on; put upward pressure on 
C)  put upward pressure on; put downward pressure on 
D)  put downward pressure on; put downward pressure on

Question 19

The premium on a pound put option is $.04. The spot rate and the exercise price is $1.52. The spot rate at the time of this option expiration is expected to be $1.51. The speculators could profit by:

Accepted Answer

A)  writing a put option. 
B)  buying a put option. 
C)  buying a call option 
D)  writing a call option and buying a call option simultaneously. 
A)  writing a put option. 
B)  buying a put option. 
C)  buying a call option 
D)  writing a call option and buying a call option simultaneously.

Question 20

If an actual put option premium is less than what is suggested by the put-call parity relationship, arbitrage can be conducted.

Accepted Answer

A) True 
 B)False

The writer of a call option is obligated to sell the underlying currency to the buyer of the option if the option is exercised.

Due to put-call parity, we can use the same formula to price calls and puts.

The price of a futures contract will generally vary significantly from that of a forward contract.

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

Which of the following is not true regarding futures contracts?

An advantage of a short straddle is that it provides the option writer with income from two separate sources.

The purchase of a currency put option would be appropriate for which of the following?

Currency futures contracts sold on an exchange:

A put 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.

The premium of a currency put option will increase if:

Managers of MNCs are typically expected to use currency derivatives for speculation in order to improve profits.

American style options can be exercised any time up to maturity.

Margin requirements are deposits placed by investors in futures contracts with their respective brokerage firms when they take their position. They are intended to minimize credit risk associated with futures contracts.

If an actual put option premium is less than what is suggested by the put-call parity relationship, arbitrage can be conducted.

Futures contracts are standardized with respect to delivery date and the futures price specified for the settlement date.

Futures and options are available for crossrates.

Assume that a currency's spot and future prices are the same, and the currency's interest rate is higher than the U.S. rate. The actions of U.S. investors to lock in this higher foreign return would the currency's spot rate and the currency's futures price.

The premium on a pound put option is $.04. The spot rate and the exercise price is $1.52. The spot rate at the time of this option expiration is expected to be $1.51. The speculators could profit by:

If an actual put option premium is less than what is suggested by the put-call parity relationship, arbitrage can be conducted.

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

The writer of a call option is obligated to sell the underlying currency to the buyer of the option if the option is exercised.

Due to put-call parity, we can use the same formula to price calls and puts.

The price of a futures contract will generally vary significantly from that of a forward contract.

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

Which of the following is not true regarding futures contracts?

An advantage of a short straddle is that it provides the option writer with income from two separate sources.

The purchase of a currency put option would be appropriate for which of the following?

Currency futures contracts sold on an exchange:

A put 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.

The premium of a currency put option will increase if:

Managers of MNCs are typically expected to use currency derivatives for speculation in order to improve profits.

American style options can be exercised any time up to maturity.

Margin requirements are deposits placed by investors in futures contracts with their respective brokerage firms when they take their position. They are intended to minimize credit risk associated with futures contracts.

If an actual put option premium is less than what is suggested by the put-call parity relationship, arbitrage can be conducted.

Futures contracts are standardized with respect to delivery date and the futures price specified for the settlement date.

Futures and options are available for crossrates.

Assume that a currency's spot and future prices are the same, and the currency's interest rate is higher than the U.S. rate. The actions of U.S. investors to lock in this higher foreign return would ____ the currency's spot rate and ____ the currency's futures price.

The premium on a pound put option is $.04. The spot rate and the exercise price is $1.52. The spot rate at the time of this option expiration is expected to be $1.51. The speculators could profit by:

If an actual put option premium is less than what is suggested by the put-call parity relationship, arbitrage can be conducted.

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 put options will be.

A put 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.

Assume that a currency's spot and future prices are the same, and the currency's interest rate is higher than the U.S. rate. The actions of U.S. investors to lock in this higher foreign return would the currency's spot rate and the currency's futures price.