Exam 5: Currency Derivatives

Andrea is an option speculator. She anticipates the Canadian dollar to depreciate from its current level of $0.90 to $0.85. Currently, Canadian dollar call options are available with an exercise price of $0.91 and a premium of $0.02. Also, Canadian dollar put options are available with an exercise price of $0.88 and a premium of $0.02. If the future spot rate of the Canadian dollar is $0.85, what is Andrea's profit or loss per unit?

A firm sells a currency futures contract, and then decides before the settlement date that it no longer wants to maintain such a position. It can close out its position by:

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)?

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?

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

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?

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

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

Forward contracts are the best technique for managing exposure arising from project bidding.

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

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?

Which of the following is true of options?

Which of the following is correct?

If the spot rate of the British pound is $1.50, and the one-year forward rate has a discount of 3 percent, the one-year forward rate is $____.

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

On January 1^st, Madison Co. ordered raw material from Japan and agreed to pay 100 million yen for this order on April 1^st. It negotiated a 3-month forward contract to obtain 100 million Japanese yen on that date at $.009. On February 1^st, the Japanese firm informed Madison Co. that it won't be able to fulfill that order. The Japanese yen spot rate on February 1^st is $.0087 and 2-month forward rate exhibits 3% discount. To offset its existing contract Madison Co. will negotiate a forward contract to ____ for the date of April 1^st and the profit/loss generated from this transaction is a ____ U.S. dollars.

With a bull spread, the spreader believes that the underlying currency will appreciate substantially, even more so than with a strangle.

Forward contracts:

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

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