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INFM > IFM 5. 10/30 QUIZ > Flashcards

IFM 5. 10/30 QUIZ Flashcards

Currency derivatives

1
Q

What is a Currency Derivative?

  1. A contract whose price is derived from the value of an underlying currency
  2. A currency that is made public
  3. A contract that has no fiscal value
  4. A type of currency that is used to describe a countries debt
A
  1. A contract whose price is derived from the value of an underlying currency
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2
Q

What can a currency derivative be used for?

A
  1. Speculate on future exchange rate movements
  2. Hedge exposure to exchange rate risk
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3
Q

How does one “speculate”?

A

using a derivative instrument to take a position in the expectation of a PROFIT

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4
Q

Individuals who enter futures contracts but do NOT deal in the ACTUAL commodities are called?
1. Hedgers
2. Auditors
3. Speculators
4. Brokers

A
  1. Speculators
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5
Q

How does one “hedge”?

A

use of derivative instruments to REDUCE the risks associated with the everyday management of corporate cash clow

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6
Q

Who uses the contracts to reduce the risk of loss from fluctuating prices?
1. Hedgers
2. Auditors
3. Speculators
4. Brokers

A
  1. Hedgers
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7
Q

Who is involved in Forward Contracts?
1. Buyer & Seller
2. Bank & Country
3. Corporation & Financial Institution

A
  1. Corporation & Financial Institution
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8
Q

What is the purpose of a Forward Contract?

A

Exchange a specified amount of cash
@ a specified exchange rate called the Forward Rate
on a specified date in the future

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9
Q

How would a MNC use a Forward Contract?
1. Speculate the price of a currency in the future
2. Hedge their imports by locking the rate at which they can obtain the cash

A
  1. Hedge their imports by locking the rate at which they can obtain the cash
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10
Q

A less liquid currency has an…
1. Smaller Bid/Ask spread
2. Wider Bid/Ask spread
3. Equal Bid/Ask spread

A
  1. Wider Bid/Ask spread
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11
Q

What influences the forward rate over time?

A

Interest Rate differential between the two countries

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12
Q

Keeping spot and forward rates equal,
would it be profitable to buy foreign currency and invest in foreign country

A

YES

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13
Q

A currency futures contract is defined as?

A

An agreement between two counterparties to exchange a specified amount of two currencies at a given date in the future at the exchange rate which is pre-determined at the moment of the contract

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14
Q

A foreign currency futures contract is

A

an alternative toa forward contract that calls for future delivery of a standard amount of foreign exchange at a fixed time, place and price

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15
Q

What does the Chicago Mercantile Exchange (CME) do?

A

Executes contracts in commodities and exchanges

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16
Q

Buyers and sellers of futures contracts provides an amount of money, called
1. barriers
2. margin
3. buffer

A
  1. margin
17
Q

Futures require that the purchaser deposit a sum as an initial what?

A

Margin/collateral

18
Q

Are forward contracts
1. liquid
2. illiquid

A
  1. illiquid
19
Q

Are future contracts
1. liquid
2. illiquid

A
  1. liquid
20
Q

In forward contracts, the amount to be exchanged can be…

A

any amount, but pinned to that amount

21
Q

Currency futures contracts are for

A

Standardized amounts

22
Q

Forward contracts involve a
1. counterparty risk
2. guarantee by the exchange

A
  1. counterparty risk

Since forward contracts are agreements to buy or sell an asset at a predetermined price on a specified future date, the failure of one party to fulfill their side of the deal can lead to financial losses for the other party.

23
Q

Futures contracts involve a
1. counterparty risk
2. guarantee by the exchange

A
  1. guarantee by the exchange
24
Q

Futures contracts differ from forward contracts because

A
  • standardized # of unites per contract
  • offer greater liquidity than forward contracts
  • typically based on U.S. $ but may be offered on cross rates
  • commonly traded on the CME
25
Q

If a speculator believes that the Mexican peso will FALL in value versus the $ by March, she should ____ a March futures contract, take a _____ position

A
  1. sell
  2. short
26
Q

If a speculator believes that the Mexican peso will RISE in value versus the U.S. $ by March, she should ___ a March futures contract, taking a ______ position

A

1 . BUY
2. LONG

27
Q

Purchasing futures to _____ payables and locks in the price at which the firm can ________ a currency

A
  1. Hedge
  2. Purchase

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