Exam 5: Currency Derivatives

A speculator in futures contracts expecting the value of a foreign currency to depreciate would likely sell futures contracts.

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

Which of the following is not true regarding options?

Currency futures can be used by MNCs to hedge payables. That is, an MNC would ____ futures to hedge a foreign payable position. Also, currency futures can be used for speculation. For example, a speculator expecting a currency to appreciate would ____ futures.

The lower bound of a put option premium is the greater of zero and the difference between the exercise price and the spot rate; the upper bound of a currency put option is the exercise price.

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

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

If your firm expects the euro to substantially depreciate, it could speculate by ____ euro call options or ____ euros forward in the forward exchange market.

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.

A straddle can only be achieved if the exercise prices of put and call options are the same.

Which of the following does not represent the risk from using forward contracts?

Currency futures contracts sold on an exchange:

Assume that a speculator received news that makes her believe that the yen will appreciate or depreciate substantially in the near future, but she is not certain of the direction. Also assume that exercise price of call and put options are the same. The most appropriate method for speculation is ____and it may be achieved by ____.

Graylon, Inc., based in Washington, exports products to a German firm and will receive payment of €200,000 in three months. On June 1, the spot rate of the euro was $1.12, and the 3-month forward rate was $1.10. On June 1, Graylon negotiated a forward contract with a bank to sell €200,000 forward in three months. The spot rate of the euro on September 1 is $1.15. Graylon will receive $____ for the euros.

When currency options are not standardized and traded over-the-counter, there is ____ liquidity and a ____ bid/ask spread.

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

Currency call options allow the purchaser to lock in the price paid for a currency. Therefore, they are often used by MNCs to hedge foreign currency payables.

The writer of a put option has a right, but not obligation, to buy the underlying currency from the option buyer.

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