Midterm #2

Question 1

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.

Answer 1

purchase Canadian dollar put options.

Question 2

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

Answer 2

B. 220,000

SOLUTION: €200,000 × $1.10 = $220,000

Question 3

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.

Answer 3

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

Question 4

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.

Answer 4

b. U.S. dollars.

Question 5

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.

Answer 5

a. contain a commitment to the owner, and are standardized.

Question 6

Due to ____, market forces should realign the cross exchange rate between two foreign currencies based on the spot exchange rates of the two currencies against the U.S. dollar.

a. forward realignment arbitrage
b. triangular arbitrage
c. covered interest arbitrage
d. locational arbitrage

Answer 6

b. triangular arbitrage

Question 7

Due to ____, market forces should realign the spot rate of a currency among banks.

a. forward realignment arbitrage
b. triangular arbitrage
c. covered interest arbitrage
d. locational arbitrage

Answer 7

d. locational arbitrage

Question 8

Due to ____, market forces should realign the relationship between the interest rate differential of two currencies and the forward premium (or discount) on the forward exchange rate between the two currencies.

a. forward realignment arbitrage
b. triangular arbitrage
c. covered interest arbitrage
d. locational arbitrage

Answer 8

c. covered interest arbitrage

Question 9

Which of the following is an appropriate form of indirect intervention?

a. To strengthen the dollar, the Fed increases the money supply to lower interest rates.
b. To weaken the dollar, the Fed reduces the money supply to increase interest rates.
c. To strengthen the dollar in the long run, the Fed attempts to reduce U.S. inflation.
d. To weaken the dollar in the long run, the Fed attempts to reduce U.S. inflation.

Answer 9

c. To strengthen the dollar in the long run, the Fed attempts to reduce U.S. inflation.

Question 10

Assume that the dollar has been consistently appreciating over a long period. The Fed decides to counteract this movement by intervening in the foreign exchange market using nonsterilized intervention. The Fed would

a. buy dollars with foreign currency and simultaneously sell Treasury securities for dollars.
b. buy dollars with foreign currency and simultaneously buy Treasury securities with dollars.
c. sell dollars for foreign currency and simultaneously sell Treasury securities for dollars.
d. sell dollars for foreign currency and simultaneously buy Treasury securities with dollars.
e. none of the above

Answer 10

e. none of the above

Question 11

Assume that the dollar has been consistently depreciating over a long period. The Fed decides to counteract this movement by intervening in the foreign exchange market using sterilized intervention. The Fed would

a. buy dollars with foreign currency and simultaneously sell Treasury securities for dollars.
b. buy dollars with foreign currency and simultaneously buy Treasury securities with dollars.
c. sell dollars for foreign currency and simultaneously sell Treasury securities for dollars.
d. sell dollars for foreign currency and simultaneously buy Treasury securities with dollars.
e. none of the above

Answer 11

b. buy dollars with foreign currency and simultaneously buy Treasury securities with dollars.

Question 12

Which of the following is true regarding the euro?

a. Exchange rate risk between participating European currencies is completely eliminated, encouraging more trade and capital flows across European borders.
b. It allows for more consistent economic conditions across countries.
c. It prevents each country from conducting its own monetary policy.
d. All of the above are true.

Answer 12

d. All of the above are true.

Question 13

Which of the following is not true regarding the Mexican peso crisis?

a. Mexico encouraged firms and consumers to buy an excessive amount of imports because the peso was stronger than it should have been.
b. Many speculators based in the U.S. speculated on the potential decline in the peso by investing their funds in Mexico.
c. In December of 1994, the central bank of Mexico allowed the peso to float freely.
d. The central bank of Mexico increased interest rates after the peso declined in value in order to prevent investors from withdrawing their investments in Mexico’s debt securities.
e. All of the above are true.

Answer 13

b. Many speculators based in the U.S. speculated on the potential decline in the peso by investing their funds in Mexico.

Question 14

The currency of Country X is pegged to the currency of Country Y. Assume that Country Y’s currency appreciates against the currency of Country Z. It is likely that Country X will export ____ to Country Z and import ____ from Country Z.

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

Answer 14

d. less; more

Question 15

A strong dollar places ____ pressure on U.S. inflation, which in turn places ____ pressure on U.S. interest rates, which in turn place ____ pressure on U.S. bond prices.

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

Answer 15

b. downward; downward; upward

Question 16

If a speculator expects that the Fed will intervene by exchanging euros for U.S. dollars, she would most likely ____ to capitalize on this intervention.

a. purchase euro put options
b. purchase euro futures contracts
c. purchase yen call options
d. sell U.S. Treasury bonds

Answer 16

a. purchase euro put options

Question 17

If a speculator expects that the Fed will intervene by exchanging dollars for Japanese yen, she would most likely ____ to capitalize on this intervention.

a. purchase yen put options
b. sell yen futures contracts
c. purchase yen call options
d. buy U.S. Treasury bonds

Answer 17

c. purchase yen call options

Question 18

The European Central Bank is located in:

a. London.
b. Denmark.
c. Luxembourg.
d. Frankfurt.

Answer 18

d. Frankfurt.

Question 19

Which one is not a disadvantage of a freely floating exchange rate system?

a. It can adversely affect a country that has high unemployment.
b. It can adversely affect a country that has high inflation.
c. The government may intervene to change the value of a given currency.
d. The exchange rate risk is high and may be costly to manage.

Answer 19

c. The government may intervene to change the value of a given currency.

Question 20

Which of the following are true about the Southeast Asian currency crisis?

a. It was preceded by several years of large capital inflows to Asia.
b. It was preceded by a five-year recession in Asia.
c. Asian interest rates declined during the crisis.
d. Asian exchange rates were pegged to the Japanese yen to resolve the crisis.

Answer 20

a. It was preceded by several years of large capital inflows to Asia.

Question 21

Which of the following countries have not adopted the euro?

a. Germany
b. Italy
c. Switzerland
d. France

Answer 21

c. Switzerland

Question 22

China’s yuan is presently:

a. allowed to fluctuate freely without any central bank intervention.
b. allowed to fluctuate but with central bank intervention.
c. pegged to the dollar.
d. pegged to the euro.

Answer 22

b. allowed to fluctuate but with central bank intervention.

Question 23

Which of the following is not true regarding Thailand?

a. Thailand was one of the slowest growing countries before the Asian crisis.
b. High levels of spending and low levels of saving placed upward pressure on prices of real estate, products, and on Thailand’s local interest rate.
c. Thailand’s baht was linked to the dollar prior to July 1997, which made Thailand an attractive site for foreign investors.
d. Thai banks provided many loans that were very risky in their attempt to make use of all of their funds.
e. All of the above are true.

Answer 23

a. Thailand was one of the slowest growing countries before the Asian crisis.

Question 24

Which of the following countries was probably the least affected (directly or indirectly) by the Asian crisis?

a. Thailand.
b. Indonesia.
c. Russia.
d. China.
e. Malaysia.

Answer 24

d. China.

Question 25

Countries that have adopted the euro tend to have very similar ____.

a. interest rates
b. inflation rates
c. income tax rates
d. budget deficits

Answer 25

a. interest rates

Question 26

Which of the following is an example of direct intervention in foreign exchange markets?

a. lowering interest rates.
b. increasing the inflation rate.
c. exchanging dollars for foreign currency.
d. imposing barriers on international trade.

Answer 26

c. exchanging dollars for foreign currency.

Question 27

Assume Countries A, B, and C produce goods that are substitutes of each other and that these countries engage in trade with each other. Assume that Country A’s currency floats against Country B’s currency, and that Country C’s currency is pegged to B’s. If A’s currency depreciates against B, then A’s exports to C should ____, and A’s imports from C should ____.

a. decrease; increase
b. decrease; decrease
c. increase; decrease
d. increase; increase

Answer 27

c. increase; decrease

Question 28

The interest rate of a country with a currency board:

a. is less stable than it would be without a currency board.
b. is typically below the interest rate of the currency to which it is tied.
c. will move in tandem with the interest rate of the currency to which it is tied.
d. is completely independent of the interest rate of the currency to which it is tied.

Answer 28

c. will move in tandem with the interest rate of the currency to which it is tied.

Question 29

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.

Answer 29

d. The writer of a put option has the obligation to sell the currency to the buyer if the option is exercised.

Question 30

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

Answer 30

c. $0.01

Question 31

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

Answer 31

d. $36,400

Question 32

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.

Answer 32

b. the spot rate of the currency is greater than the exercise price of the option.

Question 33

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

Answer 33

d. in the money; out of the money

Question 34

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.

Answer 34

a. Options are traded on exchanges, never over-the-counter.

Question 35

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

Answer 35

a. buy; buy

Question 36

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.

Answer 36

b. Sell a futures contract; buy a futures contract after the currency has depreciated

Question 37

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

Answer 37

b. 100,000

Question 38

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

Answer 38

a. upward; downward

Question 39

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.

Answer 39

c. There is an active over-the-counter market for currency futures contracts.

Question 40

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

Answer 40

d. 1.46

Question 41

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

Answer 41

b. the forward rate is less than the existing spot rate.

Question 42

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

Answer 42

d. premium; 4.08

($.59 − $.588)/$.588 × (360/30) = 4.08%

Question 43

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.

Answer 43

d. $47,500.

¥5,000,000 × $.0095/¥ = $47,500

Question 44

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

Answer 44

d. none of the above

Question 45

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.

Answer 45

c. a put buyer.

Question 46

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

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

Answer 46

b. put buyer.

Question 47

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

Answer 47

b. Corporations who expect to buy foreign currency to finance foreign subsidiaries.

Question 48

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.

Answer 48

c. The buyer decides if the option will be exercised.

Question 49

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

Answer 49

d. none of the above

Question 50

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

Answer 50

c. Hedgers and speculators are both necessary in order for the market to be liquid.

Question 51

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

Answer 51

b. options where the premiums are canceled if a trigger level is reached.

Question 52

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

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

Answer 52

b. futures contracts.

Question 53

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%

Answer 53

d. discount; 10.81%

Discount = [(FR − SR)/SR] × (360/90)
= [($.36 − $.37)/$.37] × (360/90)
= −10.81% (Discount)

Question 54

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%

Answer 54

d. premium; about 6.45%

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

Question 55

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

Answer 55

b. spot and exercise; spot

Question 56

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

Answer 56

c. exercise and spot; exercise

Question 57

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

Answer 57

b. buying; selling; buying

Question 58

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

Answer 58

be paid; 20,000

Amount received per unit = $.022 − $.02 = $.002 × THB10,000,0000 = $20,000.

Question 59

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.

Answer 59

a. −$0.01.

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

Question 60

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.

Answer 60

b. yes; $0.01.

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

Question 61

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.

Answer 61

d. $36,400.
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.

Question 62

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.

Answer 62

b. $84,000.
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.

Question 63

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

Answer 63

c. buy; sell

Question 64

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.

Answer 64

b. sell a euro futures contract; buy a futures contract after the euro has depreciated.

Question 65

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.

Answer 65

a. Options are traded on exchanges, never over-the-counter.

Question 66

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

Answer 66

c. buy; sell

Question 67

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.

Answer 67

e. all of the above are instruments used to cover foreign currency positions.

Question 68

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.

Answer 68

b. out of the money.

Question 69

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.

Answer 69

a. in the money.

Question 70

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

Answer 70

d. sell futures contracts on yen

Question 71

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

Answer 71

d. only on the expiration date; any time up to the expiration date

Question 72

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

Answer 72

e. none of the above

Net profit = $.78 + $.03 − $.86 = −$.05.

Question 73

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

Answer 73

c. $.01.

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

Question 74

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

Answer 74

e. none of the above

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

Question 75

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

Answer 75

b. −$.02.

Net profit per unit = $1.65 − $1.64 − $.03 = −$.02.

Question 76

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

Answer 76

c. 50 percent.
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%.

Question 77

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

Answer 77

e. none of the above

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

Question 78

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

Answer 78

e. none of the above

Question 79

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

Answer 79

d. $6,500,000.
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.

Question 80

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.

Answer 80

d. buying franc call options.

Question 81

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

Answer 81

c. increase substantially

Question 82

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.

Answer 82

a. buying an identical futures contract.

Question 83

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

Answer 83

c. put upward pressure on; put downward pressure on

Question 84

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.

Answer 84

c. be about the same as the 180-day forward rate.

Question 85

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

Answer 85

b. efficient after controlling for transaction costs.

Question 86

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.

Answer 86

d. The lower the exercise price relative to the spot rate, the greater the value of a currency call option, other things equal.

Question 87

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

Answer 87

a. purchasing; selling

Question 88

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

Answer 88

d. sell a euro call and buy a euro put

Question 89

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

Answer 89

d. none of the above

Question 90

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.

Answer 90

a. The futures market is primarily used by speculators while the forward market is primarily used for hedging.

Question 91

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.

Answer 91

b. −$1,562.50.
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.

Question 92

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

Answer 92

c. lower; lower

Question 93

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

Answer 93

d. less; wider

Question 94

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

Answer 94

b. greater; greater

Question 95

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. put options; forward contracts

Answer 95

d. put options; forward contracts

Question 96

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

Answer 96

a. selling; selling

Question 97

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.

Answer 97

c. sell a futures contract on francs.

Question 98

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.

Answer 98

b. contain a commitment to the owner, and can be tailored to the desire of the owner.

Question 99

Currency options are commonly traded through the ____ system.

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

Answer 99

c. GLOBEX

Question 100

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.

Answer 100

d. contain a right but not a commitment to the owner, and are standardized.

Question 101

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.

Answer 101

a. contain a commitment to the owner, and are standardized.

Question 102

The value of the Australian dollar (A$) today is $0.73. Yesterday, the value of the Australian dollar was $0.69. The Australian dollar ____ by ____%.

A. depreciated; 5.80
B. appreciated; 4.00
C. appreciated; 5.80
D. depreciated; 4.00

Answer 102

C. appreciated; 5.80

Question 103

Iiquid currencies tend to exhibit ____ volatile exchange rate movements, as the equilibrium prices of their currencies adjust to ____ changes in supply and demand conditions.

A. more; only large
B. more; even minor
C. less; even minor
D. less; only large

Answer 103

B. more; even minor

Question 104

The phrase “the dollar was mixed in trading” means that:

A. the dollar was strong in some periods and weak in other periods over the last month.
B. the dollar was involved in some currency transactions, but not others.
C. the dollar strengthened against some currencies and weakened against others.
D. the volume of trading was very high in some periods and low in other periods.

Answer 104

C. the dollar strengthened against some currencies and weakened against others.

Question 105

If a currency’s spot market is ____, its exchange rate is likely to be ____ to a single large purchase or sale transaction.

A. liquid; highly sensitive
B. liquid; insensitive
C. liquid; insensitive

Answer 105

C. liquid; insensitive

Question 106

If the Fed announces that it will decrease the U.S. interest rates, and European Central Bank takes no action, then the value of euro will ____ against the value of U.S. dollar. The Fed’s action is called ____ intervention.

A. depreciate; direct
B. appreciate; indirect
C. appreciate; direct
D. depreciate; indirect

Answer 106

B. appreciate; indirect

Question 107

The value of euro was $1.30 last week. During last week the euro depreciated by 5%. What is the value of euro today?
A. $1.330
B. $1.30
C. $1.235
D. $1.365

Answer 107

C. $1.235

5/100=0.05

1. 30 * 0.05 = 0.065
2. 30 - 0.065 =$1.235

Question 108

Assume that U.S. inflation is expected to surge in the near future. The expectation of surge
in inflation will most likely place ____ pressure on U.S. dollar immediately.
a. upward
b. downward
c. no
d. cannot be determined

Answer 108

a. upward

Question 109

If U.S. experiences a sudden surge in inflation and surge in interest rates while Japanese
inflation and interest rates remain unchanged, the value of Japanese yen will ____ against
the U.S. dollar.
a. appreciate
b. depreciate
c. remain unchanged
d. cannot be determined from the information provided.

Answer 109

d. cannot be determined from the information provided.