International Financial Management 13th Edition By Jeff Madura - Test Bank Instant Download - Complete Test Bank With Answers Sample Questions Are Posted Below 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 …
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International Financial Management 13th Edition By Jeff Madura – Test Bank
Instant Download – Complete Test Bank With Answers
Sample Questions Are Posted Below
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?
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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.
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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.
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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?
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5. Thornton, Inc. needs to invest 5 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:
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6. In the United States, the typical currency futures contract is based on a currency value in terms of:
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7. Currency futures contracts sold on an exchange contain:
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8. Currency options sold through an options exchange contain:
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9. Currency options are commonly traded through the ____ system.
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10. Forward contracts contain:
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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)?
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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)?
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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.
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14. When you own ____, there is no obligation on your part; however, when you own ____, there is an obligation on your part.
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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 being equal.
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16. When currency options are not standardized and are traded over-the-counter, there is ____ liquidity and a ____ bid/ask spread.
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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 being equal.
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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:
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19. Which of the following is true?
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20. Which of the following is true?
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21. If you expect the euro to depreciate, it would be appropriate to ____ for speculative purposes.
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22. If you expect the British pound to appreciate, you could speculate by ____ pound call options or ____ pound put options.
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23. Which of the following is correct?
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24. Research has found that the options market is:
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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:
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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.
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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:
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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.
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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:
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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)?
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31. If you purchase a straddle on euros, this implies that you:
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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.)
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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:
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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:
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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:
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36. 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:
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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:
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38. European currency options can be exercised ____; American currency options can be exercised ____.
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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.
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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:
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41. A put option on British pounds has a strike (exercise) price of $1.48. The present exchange rate is $1.55. This put option can be referred to as:
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42. Which of the following is not an instrument used by U.S.-based MNCs to cover their foreign currency positions?
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43. When the futures price on euros is below the forward rate on euros for the same settlement date, astute investors may attempt to simultaneously ____ euros forward and ____ euro futures.
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44. When the futures price is equal to the spot rate of a given currency, and the foreign country exhibits a higher interest rate than the U.S. interest rate, astute investors may attempt to simultaneously ____ the foreign currency, invest it in the foreign country, and ____ futures in the foreign currency.
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45. Which of the following would result in a profit on a euro futures contract when the euro depreciates?
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46. Which of the following is not true regarding options?
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47. A U.S. corporation has purchased currency put options to hedge a 100,000 Canadian dollar (C$) 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?
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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?
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49. 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?
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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)?
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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 ____ $____.
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52. If the observed put option premium is less than what is suggested by the put-call parity equation, astute speculators could make a profit by ____ the put option, ____ the call option, and ____ the underlying currency.
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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 put option premium is the ____ price.
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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.
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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 ____.
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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.
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57. Which of the following are most commonly traded on an exchange?
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58. Conditional currency options are:
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59. Which of the following is true regarding the currency options market?
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60. The premium of a currency put option should increase if:
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61. Which of the following is true of options?
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62. The purchase of a currency put option would be appropriate for which of the following?
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63. If you have bought the right to sell, you are a:
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64. If you have an options position in which you might be obligated to buy euros, you are a:
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65. Which of the following is true for futures, but not for forwards?
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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?
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67. The spot rate for the Singapore dollar is $.588. The 30-day forward rate is $.590. The forward rate contains an annualized ____ of ____ percent.
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68. Non-deliverable forward contracts (NDFs) are frequently used for currencies in emerging markets.
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69. The price of a futures contract will generally vary significantly from that of a forward contract.
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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.
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71. Forward contracts are usually liquidated by actual delivery of the currency, while futures contracts are usually liquidated by offsetting transactions.
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72. If an investor who previously sold futures contracts wishes to liquidate his position, he could sell futures contracts with the same maturity date.
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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.
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74. Currency options are only traded on exchanges. That is, there is no over-the-counter market for options.
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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.
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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.
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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.
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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.
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79. Due to put-call parity, we can use the same formula to price calls and puts.
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80. If an actual put option premium is less than what is suggested by the put-call parity relationship, arbitrage can be conducted.
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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.
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82. Futures contracts are standardized with respect to delivery date and the futures price specified for the settlement date.
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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.
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84. 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.
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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.
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86. The highest amount a buyer of a call or a put option can lose is the exercise price.
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87. A straddle is a speculative strategy that involves the purchase of both a call and a put.
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88. A currency put option is a contract specifying a standard volume of a particular currency to be exchanged on a specific settlement date.
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89. An option writer is the seller of a call or a put option.
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90. The forward premium is the price specified in a call or put option.
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91. The forward premium is the price specified in a call or put option.
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92. Hedgers should buy puts if they are hedging an expected inflow of foreign currency.
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93. Forward contracts are the best technique for managing exposure arising from project bidding.
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94. The currency futures markets are regulated by the International Monetary Fund.
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95. It is possible to have an opportunity loss when using futures to hedge.
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96. Margin is used in the forward market to mitigate default risk.
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97. There are no transactions costs associated with trading futures or options.
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98. Futures and options are available for cross rates.
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99. Options can be traded on an exchange or over the counter
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100. The writer of an currency call option is obligated to buy the currency if the option is exercised.
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101. American-style options can be exercised any time up to maturity.
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102. If a currency put option is out of the money, then the present exchange rate is less than the strike price.
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103. As mentioned in the text, the most common maturities for forward rates are:
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104. Managers of MNCs are typically expected to use currency derivatives for speculation in order to improve profits.
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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?
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106. 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?
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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.
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108. The spot rate of the 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?
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109. 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.)
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110. The spot rate of the 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?
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111. If you have a position where you might be obligated to sell pounds, you are:
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112. If you have bought a right to buy foreign currency, you are:
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113. The premium on a pound put option is $.04. The spot rate and the exercise price are $1.52. The spot rate at the time of this option expiration is expected to be $1.51. Speculators could profit by:
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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:
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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:
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116. Crown Co. is expecting to receive 100,000 British pounds in one year. Crown expects the spot rate of the 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 percent 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?
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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?
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118. The ____ the existing spot price relative to the strike price, the ____ valuable the call options will be.
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119. The ____ the existing spot price relative to the strike price, the ____ valuable the put options will be.
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120. On January 1, Madison Co. ordered raw material from Japan and agreed to pay 100 million yen for this order on April 1. It negotiated a 3-month forward contract to obtain 100 million Japanese yen on that date at $.009. On February 1, the Japanese firm informed Madison Co. that it wouldn’t be able to fulfill the order. The Japanese yen spot rate on February 1 is $.0087, and the 2-month forward rate exhibits a 3 percent discount. To offset its existing contract, Madison Co. will negotiate a forward contract to ____ for the date of April 1, and the profit/loss generated from this transaction is a ____ U.S. dollars.
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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 the exercise prices of call and put options are the same. The most appropriate method for speculation is a ____and it may be achieved by ____.
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122. Which of the following does not represent the risk from using forward contracts?
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123. The writer of a put option has a right, but not an obligation, to buy the underlying currency from the option buyer.
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124. A straddle can only be achieved if the exercise prices of put and call options are the same.
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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.
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126. Hedgers should buy calls if they are hedging an expected outflow of foreign currency.
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127. If a currency’s forward rate exhibits a discount, the currency is forced to appreciate.
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128. If a currency’s forward rate exhibits a premium, that currency is forced to depreciate.
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129. If a currency call option is in the money, then the present exchange rate exceeds the strike price.
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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.
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131. If an MNC desires to offset a forward contract that it previously created, it can simply ignore its obligation.
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132. Non-deliverable forward contracts (NDFs) can be used to hedge existing positions in foreign currencies that are not convertible into dollars.
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133. Forward contracts are usually negotiated with a commercial bank, while futures contracts are traded on an organized exchange.
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134. Since corporations have specialized needs, they usually prefer futures contracts to forward contracts for hedging purposes.
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135. A speculator in futures contracts who expects the value of a foreign currency to depreciate would likely sell futures contracts.
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136. The option exchanges in the United States are regulated by the Consumer Finance Protection Bureau and the Federal Trade Commission.
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137. A currency call option grants the right to sell a specific currency at a designated price within a specific time period.
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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.
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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.
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140. A high spot price relative to the strike price will result in a relatively high premium for a call option and a relatively high premium for a put option.
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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.
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142. A straddle involves the purchase of either two call or two put options at the same exercise price.
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143. A European option can be exercised at any time prior to maturity, while an American option can only be exercised at maturity.
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144. Because constructing a long straddle in a foreign currency requires payment of two option premiums, the straddle becomes profitable only if the foreign currency appreciates or depreciates substantially.
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145. A contingency graph for the purchaser of a call option compares the price paid for the option to the payoffs received under various exchange rate scenarios.
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146. The choice of a basic versus a conditional option depends on expectations about the currency’s exchange rate over the period of concern.
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147. An advantage of a short straddle is that it provides the option writer with income from two separate sources.
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148. The disadvantage of a long strangle relative to a long straddle is that the underlying currency has to fluctuate more prior to expiration.
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149. With a bull spread, the spreader believes that the underlying currency will appreciate substantially, even more so than with a strangle.
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150. A forward rate for a currency is said to exhibit a discount if:
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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 $____.
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152. Which of the following is not true regarding futures contracts?
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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.
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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.
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155. Which of the following would result in a profit on a futures contract when the underlying currency depreciates?
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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.
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157. Which of the following is true regarding options?
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158. When the existing spot rate exceeds the exercise price, a call option is ____, and a put option is ____.
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159. When a currency call option is classified as “in the money,” this indicates that
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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?
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161. Which of the following is not true regarding options?
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