Question 1

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 2

A put option on British pounds has a strike (exercise) price of $1.48. The present exchange rate is $1.55. This put option can be referred to as:

Accepted Answer

A)  in the money. 
B)  out of the money. 
C)  at the money. 
D)  at a discount. 
A)  in the money. 
B)  out of the money. 
C)  at the money. 
D)  at a discount.

Question 3

The ____ the existing spot price relative to the strike price, the ____ valuable the call 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 4

The one-year forward rate of the Japanese yen is quoted at $.013, and the spot rate of Japanese yen is quoted at $.011. The forward ____ is ____ percent.

Accepted Answer

A)  discount; 18.18 
B)  premium; 18.18 
C)  discount; 15.38 
D)  premium; 15.38 
A)  discount; 18.18 
B)  premium; 18.18 
C)  discount; 15.38 
D)  premium; 15.38

Question 5

It is possible to have an opportunity loss when using futures to hedge.

Accepted Answer

A) True 
 B)False

Question 6

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 7

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 8

If an MNC desires to offset a forward contract that it previously created, it can simply ignore its obligation.

Accepted Answer

A) True 
 B)False

Question 9

If you have a position where you might be obligated to buy Euros, you are:

Accepted Answer

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

Question 10

The currency futures markets are regulated by the International Monetary Fund.

Accepted Answer

A) True 
 B)False

Question 11

A European option can only be exercised at the expiration date, while an American option can be exercised any time prior to the expiration date.

Accepted Answer

A) True 
 B)False

Question 12

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 13

If the observed put option premium is less than what is suggested by the put-call parity equation, astute arbitrageurs could make a profit by ____ the put option, ____ the call option, and ____ the underlying currency.

Accepted Answer

A)  selling; buying; buying 
B)  buying; selling; buying 
C)  selling; buying; selling 
D)  buying; buying; buying 
A)  selling; buying; buying 
B)  buying; selling; buying 
C)  selling; buying; selling 
D)  buying; buying; buying

Question 14

If the futures rate is lower than the forward rate, astute investors would attempt to simultaneously buy futures and sell forward. Such actions would place downward pressure on the futures price and upward pressure on the forward rate.

Accepted Answer

A) True 
 B)False

Question 15

If you have bought the right to sell, you are a:

Accepted Answer

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

Question 16

A call option on Japanese yen has a strike (exercise) price of $.012. The present exchange rate is $.011. This call option can be referred to as:

Accepted Answer

A)  in the money. 
B)  out of the money. 
C)  at the money. 
D)  at a discount. 
A)  in the money. 
B)  out of the money. 
C)  at the money. 
D)  at a discount.

Question 17

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 18

Since corporations have specialized needs, they usually prefer futures contracts to forward contracts for hedging purposes.

Accepted Answer

A) True 
 B)False

Question 19

Both call and put option premiums are affected by the level of the existing spot rate relative to the strike price, the length of time before the expiration date, and the potential variability of the currency.

Accepted Answer

A) True 
 B)False

Question 20

If an investor who has previously purchased a futures contract wishes to liquidate her position, she would sell an identical futures contract with the same settlement date.

Accepted Answer

A) True 
 B)False

Exam 5: Currency Derivatives

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

A put option on British pounds has a strike (exercise) price of $1.48. The present exchange rate is $1.55. This put option can be referred to as:

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

The one-year forward rate of the Japanese yen is quoted at $.013, and the spot rate of Japanese yen is quoted at $.011. The forward ____ is ____ percent.

It is possible to have an opportunity loss when using futures to hedge.

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 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)?

If an MNC desires to offset a forward contract that it previously created, it can simply ignore its obligation.

If you have a position where you might be obligated to buy Euros, you are:

The currency futures markets are regulated by the International Monetary Fund.

A European option can only be exercised at the expiration date, while an American option can be exercised any time prior to the expiration date.

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

If the observed put option premium is less than what is suggested by the put-call parity equation, astute arbitrageurs could make a profit by ____ the put option, ____ the call option, and ____ the underlying currency.

If the futures rate is lower than the forward rate, astute investors would attempt to simultaneously buy futures and sell forward. Such actions would place downward pressure on the futures price and upward pressure on the forward rate.

If you have bought the right to sell, you are a:

A call option on Japanese yen has a strike (exercise) price of $.012. The present exchange rate is $.011. This call option can be referred to as:

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

Since corporations have specialized needs, they usually prefer futures contracts to forward contracts for hedging purposes.

Both call and put option premiums are affected by the level of the existing spot rate relative to the strike price, the length of time before the expiration date, and the potential variability of the currency.

If an investor who has previously purchased a futures contract wishes to liquidate her position, she would sell an identical futures contract with the same settlement date.

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 call options will be.

The one-year forward rate of the Japanese yen is quoted at $.013, and the spot rate of Japanese yen is quoted at $.011. The forward is percent.

If the observed put option premium is less than what is suggested by the put-call parity equation, astute arbitrageurs could make a profit by the put option, the call option, and the underlying currency.