MCQ5 Flashcards
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
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
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
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
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
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
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
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
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: C
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
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
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
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
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
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
Non-deliverable forward contracts (NDFs) are frequently used for currencies in emerging markets.
a. True
b. False
ANS: T
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.
a. True
b. False
ANS: T
Due to put-call parity, we can use the same formula to price calls and puts.
a. True
b. False
ANS: F
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.
a. True
b. False
ANS: T
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.
a. True
b. False
ANS: T
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.
a. True
b. False
ANS: T
The forward premium is the price specified in a call or put option.
a. True
b. False
ANS: F
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.
a. True
b. False
ANS: T
Margin is used in the forward market to mitigate default risk.
a. True
b. False
ANS: F
There are no transactions costs associated with trading futures or options.
a. True
b. False
ANS: F
Options can be traded on an exchange or over the counter.
a. True
b. False
ANS: T
American style options can be exercised any time up to maturity.
a. True
b. False
ANS: T
If a currency put option is out of the money, then the present exchange rate is less than the strike price.
a. True
b. False
ANS: F
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
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
The writer of a put option has a right, but not obligation, to buy the underlying currency from the option
buyer.
a. True
b. False
ANS: F
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.
a. True
b. False
ANS: F
Hedgers should buy calls if they are hedging an expected outflow of foreign currency.
a. True
b. False
ANS: T
If a currency’s forward rate exhibits a discount, the currency is forced to appreciate.
a. True
b. False
ANS: F
If a currency call option is in the money, then the present exchange rate exceeds the strike price.
a. True
b. False
ANS: T
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.
a. True
b. False
ANS: F
Non-deliverable forward contracts (NDFs) are frequently used for currencies in emerging markets.
a. True
b. False
ANS: T
Since corporations have specialized needs, they usually prefer futures contracts to forward contracts for
hedging purposes.
a. True
b. False
ANS: F
A speculator in futures contracts expecting the value of a foreign currency to depreciate would likely sell
futures contracts.
a. True
b. False
ANS: T
A currency call option grants the right to sell a specific currency at a designated price within a specific time
period.
a. True
b. False
ANS: F
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.
a. True
b. False
ANS: T
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.
8
a. True
b. False
ANS: T
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
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
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
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
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
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
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
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
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.
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.
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%.
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.
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
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
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.
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.
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)
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
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: C
If an investor who previously sold futures contracts wishes to liquidate his position, he could sell futures
contracts with the same maturity date.
a. True
b. False
ANS: F
An option writer is the seller of a call or a put option.
a. True
b. False
ANS: T
Hedgers should buy puts if they are hedging an expected inflow of foreign currency.
a. True
b. False
ANS: T
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%
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? 13 a. $1.27 b. $1.34 c. $1.16 d. $1.23
ANS: A
SOLUTION: $1.25 [1 + 7%/(360/90)] = $1.27
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.
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
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
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
On January 1st, Madison Co. ordered raw material from Japan and agreed to pay 100 million yen for this
order on April 1st. It negotiated a 3-month forward contract to obtain 100 million Japanese yen on that
date at $.009. On February 1st, the Japanese firm informed Madison Co. that it won’t be able to fulfill
that order. The Japanese yen spot rate on February 1st 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 1st 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.
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
If a currency’s forward rate exhibits a discount, the currency is forced to appreciate.
a. True
b. False
ANS: F
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
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
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
