Question 1

A straddle is a speculative strategy that involves the purchase of both a call and a put.

Accepted Answer

A) True 
 B)False

Question 2

​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 put 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

Question 3

Currency futures contracts sold on an exchange contain:

Accepted Answer

A)  a commitment to the owner, and are standardized. 
B)  a commitment to the owner, and can be tailored to the owner's desire. 
C)  a right but not a commitment to the owner, and can be tailored to the owner's desire. 
D)  a right but not a commitment to the owner, and are standardized.

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

A) True 
 B)False

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 these are correct.

Question 7

The writer of a currency call option is obligated to buy the currency if the option is exercised.

Accepted Answer

A) True 
 B)False

Question 8

Frank is an option speculator. He anticipates the Danish kroner will appreciate from its current level of $.19 to $.21. Currently, kroner call options are available with an exercise price of $.18 and a premium of $.02. Should Frank attempt to buy this option? If the future spot rate of the Danish kroner is indeed $.21, what is his profit or loss per unit?

Accepted Answer

A)  no; -$.01 
B)  yes; $.01 
C)  yes; -$.01 
D)  yes; $.03

Question 9

J&L Co. is a U.S.-based MNC that frequently exports computers to Italy. J&L typically invoices these goods in euros and is concerned that the euro will depreciate in the near future. Which of the following is not an appropriate technique under these circumstances?​

Accepted Answer

A)  ​Purchase euro put options. 
B)  ​Sell euros forward. 
C)  ​Sell euro futures contracts. 
D)  ​Sell euro put options.

Question 10

​The annualized forward premium on the euro is 7 percent. What is the 90-day forward rate on the euro if the spot rate today is $1.25?

Accepted Answer

A)  ​$1.27 
B)  ​$1.34 
C)  ​$1.16 
D)  ​$1.23

Question 11

Which of the following is true?

Accepted Answer

A)  Most forward contracts between firms and banks are for speculative purposes. 
B)  A security deposit is not required for futures contracts. 
C)  The forward contracts offered by banks have maturities for only four possible dates in the future. 
D)  None of these are correct.

Question 12

​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.

Question 13

The disadvantage of a long strangle relative to a long straddle is that the underlying currency has to fluctuate more prior to expiration.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following is true for futures, but not for forwards?

Accepted Answer

A)  actual delivery 
B)  no transactions costs 
C)  self-regulating market 
D)  None of these are correct.

Question 15

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

Question 16

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 17

Assume that the British pound futures price for September is $1.60. Given that 62,500 units are in a British pound futures contract, the seller of British pound futures will receive $____ on the delivery date.

Accepted Answer

A)  39,062.50 
B)  100,000.00 
C)  48,000.00 
D)  87,062.50

Question 18

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.)

Accepted Answer

A)  $1.30; $1.30 
B)  $1.34; $1.30 
C)  $1.30; $1.34 
D)  $1.34; $1.34

Question 19

Margin requirements require investors in futures contracts to make deposits with their respective brokerage firms when they take their position. The deposits are intended to minimize the credit risk associated with futures contracts.

Accepted Answer

A) True 
 B)False

Question 20

A U.S. corporation has purchased currency put options to hedge a 100,000 Canadian dollar (C$) receivable. The premium is $.01 and the exercise price of the option is $.75. If the spot rate at the time of maturity is $.85, what is the net amount received by the corporation if it acts rationally?

Accepted Answer

A)  $74,000 
B)  $84,000 
C)  $75,000 
D)  $85,000

Exam 5: Currency Derivatives

A straddle is a speculative strategy that involves the purchase of both a call and a put.

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 put option premium is the price.

Currency futures contracts sold on an exchange contain:

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

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

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:

The writer of a currency call option is obligated to buy the currency if the option is exercised.

J&L Co. is a U.S.-based MNC that frequently exports computers to Italy. J&L typically invoices these goods in euros and is concerned that the euro will depreciate in the near future. Which of the following is not an appropriate technique under these circumstances?

The annualized forward premium on the euro is 7 percent. What is the 90-day forward rate on the euro if the spot rate today is $1.25?

Which of the following is true?

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) ?

The disadvantage of a long strangle relative to a long straddle is that the underlying currency has to fluctuate more prior to expiration.

Which of the following is true for futures, but not for forwards?

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.

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

Assume that the British pound futures price for September is $1.60. Given that 62,500 units are in a British pound futures contract, the seller of British pound futures will receive $____ on the delivery date.

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.)

Margin requirements require investors in futures contracts to make deposits with their respective brokerage firms when they take their position. The deposits are intended to minimize the credit risk associated with futures contracts.

A U.S. corporation has purchased currency put options to hedge a 100,000 Canadian dollar (C$) receivable. The premium is $.01 and the exercise price of the option is $.75. If the spot rate at the time of maturity is $.85, what is the net amount received by the corporation if it acts rationally?

Exam 5: Currency Derivatives

A straddle is a speculative strategy that involves the purchase of both a call and a put.

​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 put option premium is the ____ price.

Currency futures contracts sold on an exchange contain:

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

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

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:

The writer of a currency call option is obligated to buy the currency if the option is exercised.

J&L Co. is a U.S.-based MNC that frequently exports computers to Italy. J&L typically invoices these goods in euros and is concerned that the euro will depreciate in the near future. Which of the following is not an appropriate technique under these circumstances?​

​The annualized forward premium on the euro is 7 percent. What is the 90-day forward rate on the euro if the spot rate today is $1.25?

Which of the following is true?

​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) ?

The disadvantage of a long strangle relative to a long straddle is that the underlying currency has to fluctuate more prior to expiration.

Which of the following is true for futures, but not for forwards?

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.​

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

Assume that the British pound futures price for September is $1.60. Given that 62,500 units are in a British pound futures contract, the seller of British pound futures will receive $____ on the delivery date.

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.)

Margin requirements require investors in futures contracts to make deposits with their respective brokerage firms when they take their position. The deposits are intended to minimize the credit risk associated with futures contracts.

A U.S. corporation has purchased currency put options to hedge a 100,000 Canadian dollar (C$) receivable. The premium is $.01 and the exercise price of the option is $.75. If the spot rate at the time of maturity is $.85, what is the net amount received by the corporation if it acts rationally?

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 put option premium is the price.

J&L Co. is a U.S.-based MNC that frequently exports computers to Italy. J&L typically invoices these goods in euros and is concerned that the euro will depreciate in the near future. Which of the following is not an appropriate technique under these circumstances?

The annualized forward premium on the euro is 7 percent. What is the 90-day forward rate on the euro if the spot rate today is $1.25?

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) ?

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.

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.)