International Financial Management 12th Edition by Jeff Madura - Test Bank

International Financial Management 12th Edition by Jeff Madura – Test Bank

 

Instant Download – Complete Test Bank With Answers

 

 

Sample Questions Are Posted Below

 

Chapter 5—Currency Derivatives

 

1. 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?

a.	purchase Canadian dollars forward.
b.	purchase Canadian dollar futures contracts.
c.	purchase Canadian dollar put options.
d.	purchase Canadian dollar call options.

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.05

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

2. 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.

a.	224,000
b.	220,000
c.	200,000
d.	230,000

 

 

ANS:  B

SOLUTION:

€200,000 ´ $1.10 = $220,000

 

 

PTS:   1                    DIF:    Moderate       OBJ:   INFM.MADU.15.05.01

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

3. 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.

a.	discount; 1.9
b.	discount; 1.8
c.	premium; 1.9
d.	premium; 1.8

 

 

ANS:  B

SOLUTION:

(F/S) – 1 = ($1.60/$1.63) – 1 = -1.8 percent.

 

 

PTS:   1                    DIF:    Moderate       OBJ:   INFM.MADU.15.05.01

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

4. The 90-day forward rate for the euro is $1.07, while the current spot rate of the euro is $1.05. What is the annualized forward premium or discount of the euro?

a.	1.9 percent discount.
b.	1.9 percent premium.
c.	7.6 percent premium.
d.	7.6 percent discount.

 

 

ANS:  C

SOLUTION:

[(F/S) – 1] ´ 360/90 = 7.6 percent.

 

 

PTS:   1                    DIF:    Moderate       OBJ:   INFM.MADU.15.05.01

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

5. Thornton, Inc. needs to invest five million Nepalese rupees in its Nepalese subsidiary to support local operations. Thornton would like its subsidiary to repay the rupees in one year. Thornton would like to engage in a swap transaction. Thus, Thornton would:

a.	convert the rupees to dollars in the spot market today and convert rupees to dollars in one year at today’s forward rate.
b.	convert the dollars to rupees in the spot market today and convert dollars to rupees in one year at the prevailing spot rate.
c.	convert the dollars to rupees in the spot market today and convert rupees to dollars in one year at today’s forward rate.
d.	convert the dollars to rupees in the spot market today and convert rupees to dollars in one year at the prevailing spot rate.

 

 

ANS:  C                    PTS:   1                    DIF:    Challenging    OBJ:   INFM.MADU.15.05.01

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Analysis

 

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

a.	euros.
b.	U.S. dollars.
c.	British pounds.
d.	Canadian dollars.

 

 

ANS:  B                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

7. Currency futures contracts sold on an exchange:

a.	contain a commitment to the owner, and are standardized.
b.	contain a commitment to the owner, and can be tailored to the desire of the owner.
c.	contain a right but not a commitment to the owner, and can be tailored to the desire of the owner.
d.	contain a right but not a commitment to the owner, and are standardized.

 

 

ANS:  A                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

8. Currency options sold through an options exchange:

a.	contain a commitment to the owner, and are standardized.
b.	contain a commitment to the owner, and can be tailored to the desire of the owner.
c.	contain a right but not a commitment to the owner, and can be tailored to the desire of the owner.
d.	contain a right but not a commitment to the owner, and are standardized.

 

 

ANS:  D                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.03

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

9. Currency options are commonly traded through the ____ system.

a.	robot
b.	Euro
c.	GLOBEX
d.	Scope

 

 

ANS:  C                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.03

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

10. Forward contracts:

a.	contain a commitment to the owner, and are standardized.
b.	contain a commitment to the owner, and can be tailored to the desire of the owner.
c.	contain a right but not a commitment to the owner, and can be tailored to the desire of the owner.
d.	contain a right but not a commitment to the owner, and are standardized.

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

11. 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)?

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.

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

12. 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)?

a.	purchase a call option on francs.
b.	obtain a forward contract to purchase francs forward.
c.	sell a futures contract on francs.
d.	all of the above are appropriate strategies for the scenario described.

 

 

ANS:  C                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Analysis

 

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

a.	selling; selling
b.	selling; purchasing
c.	purchasing; purchasing
d.	purchasing; selling

 

 

ANS:  A                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.01

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

14. When you own ____, there is no obligation on your part; however, when you own ____, there is an obligation on your part.

a.	call options; put options
b.	futures contracts; call options
c.	forward contracts; futures contracts
d.	o; forward contracts

 

 

ANS:  D                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.05

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

15. The greater the variability of a currency, the ____ will be the premium of a call option on this currency, and the ____ will be the premium of a put option on this currency, other things equal.

a.	greater; lower
b.	greater; greater
c.	lower; greater
d.	lower; lower

 

 

ANS:  B                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.05

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

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

a.	less; narrower
b.	more; narrower
c.	more; wider
d.	less; wider

 

 

ANS:  D                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

17. The shorter the time to the expiration date for a currency, the ____ will be the premium of a call option, and the ____ will be the premium of a put option, other things equal.

a.	greater; greater
b.	greater; lower
c.	lower; lower
d.	lower; greater

 

 

ANS:  C                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.05

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

18. Assume that a speculator purchases a put option on British pounds (with a strike price of $1.50) for $.05 per unit. A pound option represents 31,250 units. Assume that at the time of the purchase, the spot rate of the pound is $1.51 and continually rises to $1.62 by the expiration date. The highest net profit possible for the speculator based on the information above is:

a.	$1,562.50.
b.	-$1,562.50.
c.	-$1,250.00.
d.	-$625.00.

 

 

ANS:  B

SOLUTION:

The premium of the option is $.05 ´ (31,250 units) = $1,562.50. Since the option will not be exercised, the net profit is -$1,562.50.

 

 

PTS:   1                    DIF:    Challenging    OBJ:   INFM.MADU.15.05.05

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

19. Which of the following is true?

a.	The futures market is primarily used by speculators while the forward market is primarily used for hedging.
b.	The futures market is primarily used for hedging while the forward market is primarily used for speculating.
c.	The futures market and the forward market are primarily used for speculating.
d.	The futures market and the forward market are primarily used for hedging.

 

 

ANS:  A                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

20. Which of the following is true?

a.	Most forward contracts between firms and banks are for speculative purposes.
b.	Most future contracts represent a conservative approach by firms to hedge foreign trade.
c.	The forward contracts offered by banks have maturities for only four possible dates in the future.
d.	none of the above

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.01

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

21. If you expect the euro to depreciate, it would be appropriate to ____ for speculative purposes.

a.	buy a euro call and buy a euro put
b.	buy a euro call and sell a euro put
c.	sell a euro call and sell a euro put
d.	sell a euro call and buy a euro put

 

 

ANS:  D                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.05

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

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

a.	purchasing; selling
b.	purchasing; purchasing
c.	selling; selling
d.	selling; purchasing

 

 

ANS:  A                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.04

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Analysis

 

23. Which of the following is correct?

a.	The longer the time to maturity, the less the value of a currency call option, other things equal.
b.	The longer the time to maturity, the less the value of a currency put option, other things equal.
c.	The higher the spot rate relative to the exercise price, the greater the value of a currency put option, other things equal.
d.	The lower the exercise price relative to the spot rate, the greater the value of a currency call option, other things equal.

 

 

ANS:  D                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.04

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

24. Research has found that the options market is:

a.	efficient before controlling for transaction costs.
b.	efficient after controlling for transaction costs.
c.	highly inefficient.
d.	none of the above

 

 

ANS:  B                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.05

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

25. Assume no transactions costs exist for any futures or forward contracts. The price of British pound futures with a settlement date 180 days from now will:

a.	definitely be above the 180-day forward rate.
b.	definitely be below the 180-day forward rate.
c.	be about the same as the 180-day forward rate.
d.	none of the above; there is no relation between the futures and forward prices.

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

26. Assume that a currency’s spot and future prices are the same, and the currency’s interest rate is higher than the U.S. rate. The actions of U.S. investors to lock in this higher foreign return would ____ the currency’s spot rate and ____ the currency’s futures price.

a.	put upward pressure on; put upward pressure on
b.	put downward pressure on; put upward pressure on
c.	put upward pressure on; put downward pressure on
d.	put downward pressure on; put downward pressure on

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

27. 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:

a.	buying an identical futures contract.
b.	selling an identical futures contract.
c.	buying a futures contract with a different settlement date.
d.	selling a futures contract for a different amount of currency.
e.	purchasing a put option contract in the same currency.

 

 

ANS:  A                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

28. 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.

a.	increase slightly
b.	decrease substantially
c.	increase substantially
d.	stay the same

 

 

ANS:  C                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

29. A U.S. firm is bidding for a project needed by the Swiss government. The firm will not know if the bid is accepted until three months from now. The firm will need Swiss francs to cover expenses but will be paid by the Swiss government in dollars if it is hired for the project. The firm can best insulate itself against exchange rate exposure by:

a.	selling futures in francs.
b.	buying futures in francs.
c.	buying franc put options.
d.	buying franc call options.

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.04

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

30. 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)?

a.	$6,875,000.
b.	$7,250,000.
c.	$7,000,000.
d.	$6,500,000.
e.	none of the above

 

 

ANS:  D

SOLUTION:

Dollars received from exercising option = NZ$12.5 million ´ $.55 = $6,875,000. Premium paid for options = NZ$12.5 million ´ $.03 = $375,000. Amount of dollars received minus premium = $6,500,000.

 

 

PTS:   1                    DIF:    Moderate       OBJ:   INFM.MADU.15.05.04

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

31. If you purchase a straddle on euros, this implies that you:

a.	finance the purchase of a call option by selling a put option in the euros.
b.	finance the purchase of a call option by selling a call option in the euros.
c.	finance the purchase of a put option by selling a put option in the euros.
d.	finance the purchase of a put option by selling a call option in the euros.
e.	none of the above

 

 

ANS:  E                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.05

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

32. The premium on a pound put option is $.03 per unit. The exercise price is $1.60. The break-even point is ____ for the buyer of the put, and ____ for the seller of the put. (Assume zero transactions costs and that the buyer and seller of the put option are speculators.)

a.	$1.63; $1.63
b.	$1.63; $1.60
c.	$1.63; $1.57
d.	$1.57; $1.63
e.	none of the above

 

 

ANS:  E

SOLUTION:

Break-even point on put option to both the buyer and seller is $1.60 – $.03 = $1.57.

 

 

PTS:   1                    DIF:    Moderate       OBJ:   INFM.MADU.15.05.05

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

33. The existing spot rate of the Canadian dollar is $.82. The premium on a Canadian dollar call option is $.04. The exercise price is $.81. The option will be exercised on the expiration date if at all. If the spot rate on the expiration date is $.87, the profit as a percent of the initial investment (the premium paid) is:

a.	0 percent.
b.	25 percent.
c.	50 percent.
d.	150 percent.
e.	none of the above

 

 

ANS:  C

SOLUTION:

The net profit per unit is: $.87 – $.81 – $.04 = $.02. The net profit per unit as a percent of the initial investment per unit is: $.02/$.04 = 50%.

 

 

PTS:   1                    DIF:    Moderate       OBJ:   INFM.MADU.15.05.04

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

34. You purchase a call option on pounds for a premium of $.03 per unit, with an exercise price of $1.64; the option will not be exercised until the expiration date, if at all. If the spot rate on the expiration date is $1.65, your net profit per unit is:

a.	-$.03.
b.	-$.02.
c.	-$.01.
d.	$.02.
e.	none of the above

 

 

ANS:  B

SOLUTION:

Net profit per unit = $1.65 – $1.64 – $.03 = -$.02.

 

 

PTS:   1                    DIF:    Moderate       OBJ:   INFM.MADU.15.05.04

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

35. 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:

a.	-$.03.
b.	-$.02.
c.	-$.01.
d.	$.02.
e.	none of the above

 

 

ANS:  E

SOLUTION:

Net profit per unit = $.61 – $.58 – $.02 = $.01.

 

 

PTS:   1                    DIF:    Moderate       OBJ:   INFM.MADU.15.05.05

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

36. You are a speculator who sells a call option on Swiss francs for a premium of $.06, with an exercise price of $.64. The option will not be exercised until the expiration date, if at all. If the spot rate of the Swiss franc is $.69 on the expiration date, your net profit per unit, assuming that you have to buy Swiss francs in the market to fulfill your obligation, is:

a.	-$.02.
b.	-$.01.
c.	$.01.
d.	$.02.
e.	none of the above

 

 

ANS:  C

SOLUTION:

Net profit per unit = $.64 + $.06 – $.69 = $.01.

 

 

PTS:   1                    DIF:    Moderate       OBJ:   INFM.MADU.15.05.04

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

37. 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:

a.	-$.08.
b.	-$.03.
c.	$.05.
d.	$.08.
e.	none of the above

 

 

ANS:  E

SOLUTION:

Net profit = $.78 + $.03 – $.86 = -$.05.

 

 

PTS:   1                    DIF:    Moderate       OBJ:   INFM.MADU.15.05.05

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

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

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

 

 

ANS:  D                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.05

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

39. Macomb Corporation is a U.S. firm that invoices some of its exports in Japanese yen. If it expects the yen to weaken, it could ____ to hedge the exchange rate risk on those exports.

a.	sell yen put options
b.	buy yen call options
c.	buy futures contracts on yen
d.	sell futures contracts on yen

 

 

ANS:  D                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

40. A call option on Australian dollars has a strike (exercise) price of $.56. The present exchange rate is $.59. This call option can be referred to as:

a.	in the money.
b.	out of the money.
c.	at the money.
d.	at a discount.

 

 

ANS:  A                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.04

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

41. 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:

a.	in the money.
b.	out of the money.
c.	at the money.
d.	at a discount.

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.05

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

42. Which of the following is not an instrument used by U.S.-based MNCs to cover their foreign currency positions?

a.	forward contracts.
b.	futures contracts.
c.	non-deliverable forward contracts.
d.	options.
e.	all of the above are instruments used to cover foreign currency positions.

 

 

ANS:  E                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.01

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

43. 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.	sell; sell
b.	buy; sell
c.	sell; buy
d.	buy; buy

 

 

ANS:  B                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

44. When the futures price is equal to the spot rate of a given currency, and the foreign country exhibits a higher interest rate than the U.S. interest rate, astute investors may attempt to simultaneously ____ the foreign currency, invest it in the foreign country, and ____ futures in the foreign currency.

a.	buy; buy
b.	sell; buy
c.	buy; sell
d.	buy; buy

 

 

ANS:  C                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

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

a.	buy a euro futures contract; sell a futures contract after the euro has depreciated.
b.	sell a euro futures contract; buy a futures contract after the euro has depreciated.
c.	buy a euro futures contract; buy an additional futures contract after the euro has depreciated.
d.	none of the above would result in a profit when the euro depreciates.

 

 

ANS:  B                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

46. Which of the following is not true regarding options?

a.	Options are traded on exchanges, never over-the-counter.
b.	Similar to futures contracts, margin requirements are normally imposed on option traders.
c.	Although commissions for options are fixed per transaction, multiple contracts may be involved in a transaction, thus lowering the commission per contract.
d.	Currency options can be classified as either put or call options.
e.	All of the above are true.

 

 

ANS:  A                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.03

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

47. 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.	$74,000.
b.	$84,000.
c.	$75,000.
d.	$85,000.

 

 

ANS:  B

SOLUTION:

Dollars received from selling Canadian dollars in the spot market = C$100,000 ´ $.85 = $85,000. Premium paid for options = C$100,000 ´ $.01 = $1,000. Amount of dollars received less premium = $84,000.

 

 

PTS:   1                    DIF:    Challenging    OBJ:   INFM.MADU.15.05.05

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

48. A U.S. corporation has purchased currency call options to hedge a 70,000 pound payable. The premium is $.02 and the exercise price of the option is $.50. If the spot rate at the time of maturity is $.65, what is the total amount paid by the corporation if it acts rationally?

a.	$33,600.
b.	$46,900.
c.	$44,100.
d.	$36,400.

 

 

ANS:  D

SOLUTION:

Dollars paid when exercising the option = £70,000 ´ $.50 = $35,000. Premium paid for options = £70,000 ´ $.02 = $1,400. Amount of dollars paid = $35,000 + $1,400 = $36,400.

 

 

PTS:   1                    DIF:    Challenging    OBJ:   INFM.MADU.15.05.04

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

49. Frank is an option speculator. He anticipates the Danish kroner to 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?

a.	no; -$0.01.
b.	yes; $0.01.
c.	yes; -$0.01.
d.	yes; $0.03.

 

 

ANS:  B

SOLUTION:

The net profit per unit is: $.21 – $.18 – $.02 = $.01.

 

 

PTS:   1                    DIF:    Moderate       OBJ:   INFM.MADU.15.05.04

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

50. Carl is an option writer. In anticipation of a depreciation of the British pound from its current level of $1.50 to $1.45, he has written a call option with an exercise price of $1.51 and a premium of $.02. If the spot rate at the option’s maturity turns out to be $1.54, what is Carl’s profit or loss per unit (assuming the buyer of the option acts rationally)?

a.	-$0.01.
b.	$0.01.
c.	-$0.04.
d.	$0.04.
e.	-$0.03.

 

 

ANS:  A

SOLUTION:

The net profit per unit is $1.51 + $.02 – $1.54 = -$.01.

 

 

PTS:   1                    DIF:    Challenging    OBJ:   INFM.MADU.15.05.04

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

51. 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 ____ $____.

a.	pay; 20,000
b.	be paid; 20,000
c.	pay; 2,000
d.	be paid; 2,000
e.	none of the above

 

 

ANS:  B

SOLUTION:

Amount received per unit = $.022 – $.02 = $.002 ´ THB10,000,0000 = $20,000.

 

 

PTS:   1                    DIF:    Moderate       OBJ:   INFM.MADU.15.05.01

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

52. 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.

a.	selling; buying; buying
b.	buying; selling; buying
c.	selling; buying; selling
d.	buying; buying; buying

 

 

ANS:  B                    PTS:   1                    DIF:    Challenging    OBJ:   INFM.MADU.15.05.App.

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

53. 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 call option premium is the ____ price.

a.	spot and exercise; exercise
b.	spot and exercise; spot
c.	exercise and spot; exercise
d.	exercise and spot; spot

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.05

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

54. A call 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 call option premium is the ____ price.

a.	spot and exercise; exercise
b.	spot and exercise; spot
c.	exercise and spot; exercise
d.	exercise and spot; spot

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.04

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

55. 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.	premium; about 6%
b.	discount; about 6%
c.	discount; about 6.45%
d.	premium; about 6.45%

 

 

ANS:  D

SOLUTION:

Premium = (Forward rate – Spot rate)/Spot rate = ($.66 – $.62)/$.62 = 6.45%

 

 

PTS:   1                    DIF:    Moderate       OBJ:   INFM.MADU.15.05.01

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

56. Assume the spot rate of a currency is $.37 and the 90-day forward rate is $.36. The forward rate of this currency exhibits a ____ of ____ on an annualized basis.

a.	discount; 11.11%
b.	premium; 11.11%
c.	premium; 10.81%
d.	discount; 10.81%

 

 

ANS:  D

SOLUTION:	Discount	= [(FR – SR)/SR] ´ (360/90)
		= [($.36 – $.37)/$.37] ´ (360/90)
		= -10.81% (Discount)

 

 

PTS:   1                    DIF:    Moderate       OBJ:   INFM.MADU.15.05.01

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.02

KEY:  Bloom’s: Application

 

57. Which of the following are most commonly traded on an exchange?

a.	forward contracts.
b.	futures contracts.
c.	currencies
d.	none of the above

 

 

ANS:  B                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

58. Conditional currency options are:

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

 

 

ANS:  B                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.05

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

59. Which of the following is true regarding the options markets?

a.	Hedgers and speculators both attempt to lower risk.
b.	Hedgers attempt to lower risk, while speculators attempt to make riskless profits.
c.	Hedgers and speculators are both necessary in order for the market to be liquid.
d.	all of the above

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.03

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

60. The premium of a currency put option will increase if:

a.	the volatility of the underlying asset goes up.
b.	the time to maturity goes up.
c.	the spot rate declines.
d.	none of the above

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.05

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

61. Which of the following is true of options?

a.	The writer decides whether the option will be exercised.
b.	The writer pays the buyer the option premium.
c.	The buyer decides if the option will be exercised.
d.	More than one of these.

 

 

ANS:  C                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.03

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

62. The purchase of a currency put option would be appropriate for which of the following?

a.	Investors who expect to buy a foreign bond in one month.
b.	Corporations who expect to buy foreign currency to finance foreign subsidiaries.
c.	Corporations who expect to collect on a foreign account receivable in one month.
d.	all of the above

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.05

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

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

a.	call writer.
b.	put buyer.
c.	futures buyer.
d.	put writer.

 

 

ANS:  B                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.05

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

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

a.	a call writer.
b.	a put writer.
c.	a put buyer.
d.	a futures seller.

 

 

ANS:  C                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.05

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

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

a.	actual delivery.
b.	no transactions costs.
c.	self regulation.
d.	none of the above

 

 

ANS:  D                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

66. 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?

a.	$44,500.
b.	$45,000.
c.	$526 million.
d.	$47,500.

 

 

ANS:  D

SOLUTION:

¥5,000,000 ´ $.0095/¥ = $47,500

 

 

PTS:   1                    DIF:    Moderate       OBJ:   INFM.MADU.15.05.01

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

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

a.	discount; -4.07
b.	premium; 4.07
c.	discount; -4.08
d.	premium; 4.08
e.	premium; 3.40

 

 

ANS:  D

SOLUTION:

($.59 – $.588)/$.588 ´ (360/30) = 4.08%

 

 

PTS:   1                    DIF:    Moderate       OBJ:   INFM.MADU.15.05.01

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

68. Non-deliverable forward contracts (NDFs) are frequently used for currencies in emerging markets.
69. True
70. False

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.01

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

69. The price of a futures contract will generally vary significantly from that of a forward contract.
70. True
71. False

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.01

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

70. 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.
71. True
72. False

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03                                       STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

71. Forward contracts are usually liquidated by actual delivery of the currency, while futures contracts are usually liquidated by offsetting transactions.
72. True
73. False

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.03

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

72. If an investor who previously sold futures contracts wishes to liquidate his position, he could sell futures contracts with the same maturity date.
73. True
74. False

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.05

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

73. Since futures contracts are traded on an exchange, the exchange will always take the “other side” of the transaction in terms of accepting the credit risk.
74. True
75. False

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

74. Currency options are only traded on exchanges. That is, there is no over-the-counter market for options.
75. True
76. False

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.03

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

75. Both call and put option premiums are affected by the level of the existing spot price relative to the strike price; for example, a high spot price relative to the strike price will result in a relatively high premium for a call option but a relatively low premium for a put option.
76. True
77. False

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.04

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

76. The writer of a call option is obligated to sell the underlying currency to the buyer of the option if the option is exercised.
77. True
78. False

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.05

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

77. The lower bound of the call option premium is the greater of zero and the difference between the spot rate and the exercise price; the upper bound of a currency call option is the spot rate.
78. True
79. False

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.App.

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

78. 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.
79. True
80. False

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.App.

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

79. Due to put-call parity, we can use the same formula to price calls and puts.
80. True
81. False

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.App.

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

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

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.App.

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

81. If the futures rate is above the forward rate, actions by rational investors would put upward pressure on the forward rate and downward pressure on the futures rate.
82. True
83. False

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

82. Futures contracts are standardized with respect to delivery date and the futures price specified for the settlement date.
83. True
84. False

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

83. 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.
84. True
85. False

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

84. 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.
85. True
86. False

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

85. 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.
86. True
87. False

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.05

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

86. The highest amount a buyer of a call or a put option can lose is the exercise price.
87. True
88. False

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.04

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

87. A straddle is a speculative strategy that represents the purchase of both a call and a put.
88. True
89. False

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.05

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

88. A currency put option is a contract specifying a standard volume of a particular currency to be exchanged on a specific settlement date.
89. True
90. False

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.05

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

89. An option writer is the seller of a call or a put option.
90. True
91. False

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.03

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

90. The forward premium is the price specified in a call or put option.
91. True
92. False

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.01

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

91. An MNC frequently uses either forward or futures contracts to hedge its exposure to foreign receivables. To do so, the MNC can either sell the foreign currency forward or sell futures.
92. True
93. False

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

92. Hedgers should buy puts if they are hedging an expected inflow of foreign currency.
93. True
94. False

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.App.

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

93. Forward contracts are the best technique for managing exposure arising from project bidding.
94. True
95. False

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.04

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

94. The currency futures markets are regulated by the International Monetary Fund.
95. True
96. False

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

95. It is possible to have an opportunity loss when using futures to hedge.
96. True
97. False

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

96. Margin is used in the forward market to mitigate default risk.
97. True
98. False

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

97. There are no transactions costs associated with trading futures or options.
98. True
99. False

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

98. Futures and options are available for crossrates.
99. True
100. False

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

99. Options can be traded on an exchange or over the counter.
100. True
101. False

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

100. The writer of an uncovered call can experience a loss limited to the option premium.
101. True
102. False

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.05

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

101. American style options can be exercised any time up to maturity.
102. True
103. False

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.05

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

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

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.05

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

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

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.

 

 

ANS:  A                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.01

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

104. Managers of MNCs are typically expected to use currency derivatives for speculation in order to improve profits.
105. True
106. False

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.04

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

105. The 180-day forward rate for the euro is $1.34, while the current spot rate of the euro is $1.29. What is the annualized forward premium or discount of the euro?

a.	7.46% premium
b.	7.46% discount
c.	7.75% premium
d.	7.75% discount

 

 

ANS:  C

SOLUTION:

[(F/S) – 1] ´ 360/180 = [($1.34/$1.29) – 1] ´ 360/180 = 7.75%

 

 

PTS:   1                    DIF:    Moderate       OBJ:   INFM.MADU.15.05.01

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

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

a.	$1.27
b.	$1.34
c.	$1.16
d.	$1.23

 

 

ANS:  A

SOLUTION:

$1.25 ´ [1 + 7%/(360/90)] = $1.27

 

 

PTS:   1                    DIF:    Moderate       OBJ:   INFM.MADU.15.05.01

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

107. 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.

a.	discount; 18.18
b.	premium; 18.18
c.	discount; 15.38
d.	premium; 15.38

 

 

ANS:  B

SOLUTION:

(F/S) – 1 = ($.013/$.011) – 1 = 18.18%

 

 

PTS:   1                    DIF:    Moderate       OBJ:   INFM.MADU.15.05.01

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

108. 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?

a.	$1.52
b.	$1.61
c.	$1.37
d.	$1.46

 

 

ANS:  D

SOLUTION:

$1.49 ´ (1 – .02) = $1.46

 

 

PTS:   1                    DIF:    Moderate       OBJ:   INFM.MADU.15.05.01

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

109. 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?

a.	$1.28
b.	$1.30
c.	$1.42
d.	$1.16

 

 

ANS:  B

SOLUTION:

$1.29 ´ [1+ 0.10/(360/30)] = $1.30

 

 

PTS:   1                    DIF:    Moderate       OBJ:   INFM.MADU.15.05.01

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

110. 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.)

a.	$1.30; $1.30
b.	$1.34; $1.30
c.	$1.30; $1.34
d.	$1.34; $1.34

 

 

ANS:  D

SOLUTION:

Break-even point on call option to both the buyer and seller is $1.32 + $.02 = $1.34.

 

 

PTS:   1                    DIF:    Moderate       OBJ:   INFM.MADU.15.05.04

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

111. If you have a position where you might be obligated to sell pounds, you are:

a.	a call writer.
b.	a call buyer.
c.	a put writer.
d.	a put buyer.

 

 

ANS:  A                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.04

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

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

a.	a call writer.
b.	a call buyer.
c.	a put writer.
d.	a put buyer.

 

 

ANS:  B                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.04

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

113. 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.	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.

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.04

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

114. 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:

a.	in the money.
b.	out of the money.
c.	at the money.
d.	at a discount.

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.04

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

115. A put option on Swiss franc has a strike (exercise) price of $.92. The present exchange rate is $.89. This put option can be referred to as:

a.	in the money.
b.	out of the money.
c.	at the money.
d.	at a discount.

 

 

ANS:  A                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.05

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

116. 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?

a.	buy a put option and receive $150,000.
b.	sell pounds forward and receive $155,000.
c.	sell a call option and receive $156,000.
d.	sell a put option and receive $157,000.

 

 

ANS:  B

SOLUTION:	There are only two feasible choices for hedging in these circumstances: selling pounds forward or buying a put option.
	Sell pounds forward:
	One-year forward rate = $1.51 ´ (1 + .0265) = $1.55
	Dollars received = 100,000 ´ $1.55 = $155,000
	Buy put option:
	Amount received per unit = $1.54 – $.03 = $1.51
	Total amount of receivables in U.S.$ = 100,000 ´ $1.51 = $151,000

 

 

PTS:   1                    DIF:    Moderate       OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

117. 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?

a.	purchase euro put options.
b.	sell euros forward.
c.	sell euro futures contracts.
d.	sell euro put options.

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.05

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

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

a.	higher; less
b.	higher; more
c.	lower; less
d.	lower; more

 

 

ANS:  A                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.App.

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

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

a.	higher; less
b.	higher; more
c.	lower; less
d.	lower; more

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.App.

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

120. 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.

a.	sell yen; gain of $60,000
b.	sell yen; loss of $60,000
c.	buy yen; gain of $30,000
d.	to buy yen; loss of $30,000

 

 

ANS:  B

SOLUTION:	2-month forward rate = $.0087 ´ (1 – .03) = $.0084
	Profit/loss from transaction = (100,000,000 ´ $.0084) – (100,000,000 ´ .009) = $60,000 loss.

 

 

PTS:   1                    DIF:    Moderate       OBJ:   INFM.MADU.15.05.01

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

121. 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 ____.

a.	straddle; purchase put option and purchase call option.
b.	strangle; purchase put option and sell call option.
c.	strangle; sell put option and sell put option.
d.	straddle; sell put option and buy call option.

 

 

ANS:  A                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.05

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Analysis

 

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

a.	if a forward contract is used to hedge receivables, and the spot exchange rate at the expiration of contract exceeds the contract price.
b.	if a forward contract is used to hedge receivables, and the spot exchange rate at the time of expiration of contract is lower than the contract price.
c.	if a forward contract is used to hedge payables, and the spot exchange rate at the time of expiration of contract is lower than the contract price.
d.	if a forward contract is used to hedge payables or receivables and the amount to be received or paid is cancelled.

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.01

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

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

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.05

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

124. A straddle can only be achieved if the exercise prices of put and call options are the same.
125. True
126. False

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.05

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

125. 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.
126. True
127. False

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

126. Hedgers should buy calls if they are hedging an expected outflow of foreign currency.
127. True
128. False

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

127. If a currency’s forward rate exhibits a discount, the currency is forced to appreciate.
128. True
129. False

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.01

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

128. If a currency’s forward rate exhibits a premium, that currency is forced to depreciate.
129. True
130. False

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.01

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

129. If a currency call option is in the money, then the present exchange rate exceeds the strike price.
130. True
131. False

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.04

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

130. If the forward rate for a currency is less than the spot rate for that currency, the forward rate is said to exhibit a premium.
131. True
132. False

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.01

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

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

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.01

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

132. Non-deliverable forward contracts (NDFs) are frequently used for currencies in emerging markets.
133. True
134. False

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.01

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

133. Forward contracts are usually negotiated with a commercial bank, while futures contracts are traded on an organized exchange.
134. True
135. False

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

134. Since corporations have specialized needs, they usually prefer futures contracts to forward contracts for hedging purposes.
135. True
136. False

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

135. A speculator in futures contracts expecting the value of a foreign currency to depreciate would likely sell futures contracts.
136. True
137. False

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

136. Currency options are only traded on exchanges. That is, there is no over-the-counter market for options.
137. True
138. False

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.03

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

137. A currency call option grants the right to sell a specific currency at a designated price within a specific time period.
138. True
139. False

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.04

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

138. 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.
139. True
140. False

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.04

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

139. When the current exchange rate is less than the strike price, a call option with that strike price will be in the money and a put option with that strike price will be out of the money.
140. True
141. False

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.04

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

140. Both call and put option premiums are affected by the level of the existing spot price relative to the strike price; for example, a high spot price relative to the strike price will result in a relatively high premium for a call option but a relatively low premium for a put option.
141. True
142. False

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.App.

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

141. 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.
142. True
143. False

 

ANS:  T                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.05

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

142. A straddle represents the purchase of either two call or two put options at the same exercise price.
143. True
144. False

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.05

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

143. A European option can be exercised at any time prior to maturity, while an American option can only be exercised at maturity.
144. True
145. False

 

ANS:  F                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.05

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

144. The lower bound of the call option premium is the greater of zero and the difference between the spot rate and the exercise price; the upper bound of a currency call option is the spot rate.
145. True
146. False

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.App.

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

145. 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.
146. True
147. False

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.App.

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

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

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.App.

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

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

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.App.

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

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

 

ANS:  T                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.App.

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

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

 

ANS:  F                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.App.

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

150. A forward rate for a currency is said to exhibit a discount if

a.	the forward rate exceeds the existing spot rate.
b.	the forward rate is less than the existing spot rate.
c.	the forward rate exceeds the expected future spot rate.
d.	the forward rate is less than the expected future spot rate.
e.	none of the above

 

 

ANS:  B                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.01

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

151. 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.	1.50
b.	1.47
c.	1.55
d.	1.46
e.	None of the above

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.01

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

152. Which of the following is not true regarding futures contracts?

a.	Unlike forward contracts, they are generally traded on an exchange.
b.	Futures contracts are standardized with respect to delivery date and size of the contract.
c.	There is an active over-the-counter market for currency futures contracts.
d.	Currency futures can be used by speculators who attempt to profit from exchange rate movements.

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

153. When the futures price is above the forward rate, astute investors may attempt to simultaneously buy a currency forward and sell futures in that currency. These actions would place ____ pressure on the forward rate and ____ pressure on the futures rate.

a.	upward; downward
b.	upward; upward
c.	downward; upward
d.	downward; downward

 

 

ANS:  A                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

154. 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.

a.	39,062.50
b.	100,000
c.	48,000
d.	87,062.50

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

155. Which of the following would result in a profit of a futures contract when the underlying currency 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.

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

156. 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.

a.	buy; buy
b.	sell; sell
c.	buy; sell
d.	sell; buy

 

 

ANS:  A                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

157. Which of the following is not true regarding options?

a.	Options are traded on exchanges, never over-the-counter.
b.	Similar to futures contracts, margin requirements are normally imposed on option traders.
c.	Although commissions for options are fixed per transaction, multiple contracts may be involved in a transaction, thus lowering the commission per contract.
d.	Currency options can be classified as either put or call options.
e.	All of the above are true.

 

 

ANS:  A                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.02

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

158. When the existing spot rate exceeds the exercise price, a call option is ____, and a put option is ____.

a.	out of the money; in the money
b.	out of the money; out of the money
c.	in the money; in the money
d.	in the money; out of the money

 

 

ANS:  D                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.04

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Knowledge

 

159. When a currency call option is classified as “in the money,” this indicates that

a.	the spot rate of the currency is less than the exercise price of the option.
b.	the spot rate of the currency is greater than the exercise price of the option.
c.	the buyer of the option would generate a profit; that is, the spot rate would exceed the sum of the exercise price and the premium paid.
d.	the buyer of the option would generate a profit; that is, the exercise price would exceed the sum of the spot rate and the premium paid.

 

 

ANS:  B                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.04

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

160. 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?

a.	$33,600
b.	$46,900
c.	$44,100
d.	$36,400

 

 

ANS:  D                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.04

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

161. 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.	$0.03
b.	$0.05
c.	$0.01
d.	$0.04

 

 

ANS:  C                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.04

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Application

 

162. Which of the following is not true regarding options?

a.	The buyer of a call option has the right to buy the currency at the strike price.
b.	The writer of a call option has the obligation to sell the currency to the buyer if the option if exercised.
c.	The buyer of a put option has the right to sell the currency at the strike price.
d.	The writer of a put option has the obligation to sell the currency to the buyer if the option is exercised.

 

 

ANS:  D                    PTS:   1                    DIF:    Easy               OBJ:   INFM.MADU.15.05.05

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension

 

163. 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.

a.	selling; buying; buying
b.	buying; selling; buying
c.	selling; buying; selling
d.	buying; buying; buying

 

 

ANS:  B                    PTS:   1                    DIF:    Moderate        OBJ:   INFM.MADU.15.05.App.

NAT:  BUSPROG.INFM.MADU.15.03      STA:   DISC.INFM.MADU.15.10

KEY:  Bloom’s: Comprehension