Question 1

The writer of an uncovered call can experience a loss limited to the option premium.

Accepted Answer

A) True 
 B)False

Question 2

The one-year forward rate of the British pound is quoted at $1.60, and the spot rate of the British pound is quoted at $1.63. The forward ____ is ____ percent.

Accepted Answer

A)  discount; 1.9 
B)  discount; 1.8 
C)  premium; 1.9 
D)  premium; 1.8 
A)  discount; 1.9 
B)  discount; 1.8 
C)  premium; 1.9 
D)  premium; 1.8

Question 3

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 4

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 5

Your company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to hedge your position by selling Japanese yen forward. The current spot rate of the yen is $.0089, while the forward rate is $.0095. You expect the spot rate in 60 days to be $.0090. How many dollars will you receive for the 5,000,000 yen 60 days from now?

Accepted Answer

A)  $44,500. 
B)  $45,000. 
C)  $526 million. 
D)  $47,500. 
A)  $44,500. 
B)  $45,000. 
C)  $526 million. 
D)  $47,500.

Question 6

You purchase a put option on Swiss francs for a premium of $.02, with an exercise price of $.61. The option will not be exercised until the expiration date, if at all. If the spot rate on the expiration date is $.58, 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 7

Research has found that the options market is:

Accepted Answer

A)  efficient before controlling for transaction costs. 
B)  efficient after controlling for transaction costs. 
C)  highly inefficient. 
D)  none of the above 
A)  efficient before controlling for transaction costs. 
B)  efficient after controlling for transaction costs. 
C)  highly inefficient. 
D)  none of the above

Question 8

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 9

If you expect the British pound to appreciate, you could speculate by ____ pound call options or ____ pound put options.

Accepted Answer

A)  purchasing; selling 
B)  purchasing; purchasing 
C)  selling; selling 
D)  selling; purchasing 
A)  purchasing; selling 
B)  purchasing; purchasing 
C)  selling; selling 
D)  selling; purchasing

Question 10

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 11

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 12

The spot rate of British pound is quoted at $1.49. The 90-day forward rate exhibits a 2% discount. What is the 90-day forward rate of the pound?

Accepted Answer

A)  $1.52 
B)  $1.61 
C)  $1.37 
D)  $1.46 
A)  $1.52 
B)  $1.61 
C)  $1.37 
D)  $1.46

Question 13

Options can be traded on an exchange or over the counter.

Accepted Answer

A) True 
 B)False

Question 14

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 15

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

Accepted Answer

A) True 
 B)False

Question 16

Assume the spot rate of the Swiss franc is $.62 and the one-year forward rate is $.66. The forward rate exhibits a ____ of ____.

Accepted Answer

A)  premium; about 6% 
B)  discount; about 6% 
C)  discount; about 6.45% 
D)  premium; about 6.45% 
A)  premium; about 6% 
B)  discount; about 6% 
C)  discount; about 6.45% 
D)  premium; about 6.45%

Question 17

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 18

A firm wants to use an option to hedge 12.5 million in receivables from New Zealand firms. The premium is $.03. The exercise price is $.55. If the option is exercised, what is the total amount of dollars received (after accounting for the premium paid)?

Accepted Answer

A)  $6,875,000. 
B)  $7,250,000. 
C)  $7,000,000. 
D)  $6,500,000. 
E)  none of the above 
A)  $6,875,000. 
B)  $7,250,000. 
C)  $7,000,000. 
D)  $6,500,000. 
E)  none of the above

Question 19

European currency options can be exercised ____; American currency options can be exercised ____.

Accepted Answer

A)  any time up to the expiration date; any time up to the expiration date 
B)  any time up to the expiration date; only on the expiration date 
C)  only on the expiration date; only on the expiration date 
D)  only on the expiration date; any time up to the expiration date 
A)  any time up to the expiration date; any time up to the expiration date 
B)  any time up to the expiration date; only on the expiration date 
C)  only on the expiration date; only on the expiration date 
D)  only on the expiration date; any time up to the expiration date

Question 20

You are a speculator who sells a put option on Canadian dollars for a premium of $.03 per unit, with an exercise price of $.86. The option will not be exercised until the expiration date, if at all. If the spot rate of the Canadian dollar is $.78 on the expiration date, your net profit per unit is:

Accepted Answer

A)  -$.08. 
B)  -$.03. 
C)  $.05. 
D)  $.08. 
E)  none of the above 
A)  -$.08. 
B)  -$.03. 
C)  $.05. 
D)  $.08. 
E)  none of the above

The writer of an uncovered call can experience a loss limited to the option premium.

The one-year forward rate of the British pound is quoted at $1.60, and the spot rate of the British pound is quoted at $1.63. The forward is percent.

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:

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?

You purchase a put option on Swiss francs for a premium of $.02, with an exercise price of $.61. The option will not be exercised until the expiration date, if at all. If the spot rate on the expiration date is $.58, your net profit per unit is:

Research has found that the options market is:

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

If you expect the British pound to appreciate, you could speculate by pound call options or pound put options.

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

The spot rate of British pound is quoted at $1.49. The 90-day forward rate exhibits a 2% discount. What is the 90-day forward rate of the pound?

Options can be traded on an exchange or over the counter.

Conditional currency options are:

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

Assume the spot rate of the Swiss franc is $.62 and the one-year forward rate is $.66. The forward rate exhibits a of .

A firm wants to use an option to hedge 12.5 million in receivables from New Zealand firms. The premium is $.03. The exercise price is $.55. If the option is exercised, what is the total amount of dollars received (after accounting for the premium paid)?

European currency options can be exercised ; American currency options can be exercised .

You are a speculator who sells a put option on Canadian dollars for a premium of $.03 per unit, with an exercise price of $.86. The option will not be exercised until the expiration date, if at all. If the spot rate of the Canadian dollar is $.78 on the expiration date, your net profit per unit is:

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 an uncovered call can experience a loss limited to the option premium.

The one-year forward rate of the British pound is quoted at $1.60, and the spot rate of the British pound is quoted at $1.63. The forward ____ is ____ percent.

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:

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?

You purchase a put option on Swiss francs for a premium of $.02, with an exercise price of $.61. The option will not be exercised until the expiration date, if at all. If the spot rate on the expiration date is $.58, your net profit per unit is:

Research has found that the options market is:

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

If you expect the British pound to appreciate, you could speculate by ____ pound call options or ____ pound put options.

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

The spot rate of British pound is quoted at $1.49. The 90-day forward rate exhibits a 2% discount. What is the 90-day forward rate of the pound?

Options can be traded on an exchange or over the counter.

Conditional currency options are:

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

Assume the spot rate of the Swiss franc is $.62 and the one-year forward rate is $.66. The forward rate exhibits a ____ of ____.

A firm wants to use an option to hedge 12.5 million in receivables from New Zealand firms. The premium is $.03. The exercise price is $.55. If the option is exercised, what is the total amount of dollars received (after accounting for the premium paid)?

European currency options can be exercised ____; American currency options can be exercised ____.

You are a speculator who sells a put option on Canadian dollars for a premium of $.03 per unit, with an exercise price of $.86. The option will not be exercised until the expiration date, if at all. If the spot rate of the Canadian dollar is $.78 on the expiration date, your net profit per unit is:

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 one-year forward rate of the British pound is quoted at $1.60, and the spot rate of the British pound is quoted at $1.63. The forward is percent.

If you expect the British pound to appreciate, you could speculate by pound call options or pound put options.

Assume the spot rate of the Swiss franc is $.62 and the one-year forward rate is $.66. The forward rate exhibits a of .

European currency options can be exercised ; American currency options can be exercised .