Multinational Business Finance, 14e (Eiteman)
Chapter 7 Foreign Currency Derivatives: Futures and Options
7.1 Foreign Currency Futures
1) Financial derivatives are powerful tools that can be used by management for purposes of:
A) speculation.
B) hedging.
C) human resource management.
D) A and B above
2) A foreign currency ________ contract calls for the future delivery of a standard amount of
foreign exchange at a fixed time, place, and price.
A) futures
B) forward
C) option
D) swap
3) Which of the following is NOT a contract specification for currency futures trading on an
organized exchange?
A) size of the contract
B) maturity date
C) last trading day
D) All of the above are specified.
4) About ________ of all futures contracts are settled by physical delivery of foreign exchange
between buyer and seller.
A) 0%
B) 5%
C) 50%
D) 95%
5) Futures contracts require that the purchaser deposit an initial sum as collateral. This deposit is
called a:
A) collateralized deposit.
B) marked market sum.
C) margin.
D) settlement.
6) A speculator in the futures market wishing to lock in a price at which they could ________ a
foreign currency will ________ a futures contract.
A) buy; sell
B) sell; buy
C) buy; buy
D) none of the above
7) A speculator that has ________ a futures contract has taken a ________ position.
A) sold; long
B) purchased; short
C) sold; short
D) purchased; sold
8) Peter Simpson thinks that the U.K. pound will cost $1.43/£ in six months. A 6-month currency
futures contract is available today at a rate of $1.44/£. If Peter was to speculate in the currency
futures market, and his expectations are correct, which of the following strategies would earn
him a profit?
A) Sell a pound currency futures contract.
B) Buy a pound currency futures contract.
C) Sell pounds today.
D) Sell pounds in six months.
9) Jack Hemmings bought a 3-month British pound futures contract for $1.4400/£ only to see the
dollar appreciate to a value of $1.4250 at which time he sold the pound futures. If each pound
futures contract is for an amount of £62,500, how much money did Jack gain or lose from his
speculation with pound futures?
A) $937.50 loss
B) $937.50 gain
C) £937.50 loss
D) £937.50 gain
10) Which of the following statements regarding currency futures contracts and forward
contracts is NOT true?
A) A futures contract is a standardized amount per currency whereas the forward contact is for
any size desired.
B) A futures contract is for a fixed maturity whereas the forward contract is for any maturity you
like up to one year.
C) Futures contracts trade on organized exchanges whereas forwards take place between
individuals and banks with other banks via telecom linkages.
D) All of the above are true.
11) Which of the following is NOT a difference between a currency futures contract and a
forward contract?
A) The futures contract is marked to market daily, whereas the forward contract is only due to be
settled at maturity.
B) The counterparty to the futures participant is unknown with the clearinghouse stepping into
each transaction, whereas the forward contract participants are in direct contact setting the
forward specifications.
C) A single sales commission covers both the purchase and sale of a futures contract, whereas
there is no specific sales commission with a forward contract because banks earn a profit through
the bid-ask spread.
D) All of the above are true.
12) Jasper Pernik is a currency speculator who enjoys “betting” on changes in the foreign
currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ and the 6–
month forward rate is ¥128.53/$. Jasper thinks the yen will move to ¥128.00/$ in the next six
months. Jasper should ________ at ________ to profit from changing currency values.
A) buy yen; the forward rate
B) buy dollars; the forward rate
C) sell yen; the forward rate
D) There is not enough information to answer this question.
13) Jasper Pernik is a currency speculator who enjoys “betting” on changes in the foreign
currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ and the 6–
month forward rate is ¥128.53/$. Jasper thinks the yen will move to ¥128.00/$ in the next six
months. If Jasper buys $100,000 worth of yen at today’s spot price and sells within the next six
months at ¥128/$, he will earn a profit of:
A) $146.09.
B) $101,460.94.
C) $1460.94.
D) nothing; he will lose money
14) Jasper Pernik is a currency speculator who enjoys “betting” on changes in the foreign
currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ and the 6–
month forward rate is ¥128.53/$. Jasper thinks the yen will move to ¥128.00/$ in the next six
months. If Jasper buys $100,000 worth of yen at today’s spot price her potential gain is ________
and her potential loss is ________.
A) $100,000; unlimited
B) unlimited; unlimited
C) $100,000; $100,000
D) unlimited; $100,000
15) Jasper Pernik is a currency speculator who enjoys “betting” on changes in the foreign
currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ and the 6–
month forward rate is ¥128.53/$. Jasper thinks the yen will move to ¥128.00/$ in the next six
months. If Jasper’s expectations are correct, then he could profit in the forward market by
________ and then ________.
A) buying yen for ¥128.00/$; selling yen at ¥128.53/$
B) buying yen for ¥128.53/$; selling yen at ¥128.00/$
C) There is not enough information to answer this question.
D) He could not profit in the forward market.
16) Currency futures contracts have become standard fare and trade readily in the world money
centers.
17) The major difference between currency futures and forward contracts is that futures contracts
are standardized for ease of trading on an exchange market whereas forward contracts are
specialized and tailored to meet the needs of clients.
18) Jasper Pernik is a currency speculator who enjoys “betting” on changes in the foreign
currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ and the 6–
month forward rate is ¥128.53/$. Jasper would earn a higher rate of return by buying yen and
selling a forward contract than if he had invested her money in 6-month US Treasury securities
at an annual rate of 2.50%.
19) Why are foreign currency futures contracts more popular with individuals and banks while
foreign currency forwards are more popular with businesses?
1) A foreign currency ________ gives the purchaser the right, not the obligation, to buy a given
amount of foreign exchange at a fixed price per unit for a specified period.
A) future
B) forward
C) option
D) swap
2) A foreign currency ________ option gives the holder the right to ________ a foreign
currency, whereas a foreign currency ________ option gives the holder the right to ________ an
option.
A) call, buy, put, sell
B) call, sell, put, buy
C) put, hold, call, release
D) none of the above
3) The price at which an option can be exercised is called the:
A) premium.
B) spot rate.
C) strike price.
D) commission.
4) An ________ option can be exercised only on its expiration date, whereas a/an ________
option can be exercised anytime between the date of writing up to and including the exercise
date.
A) American; European
B) American; British
C) Asian; American
D) European; American
5) A/An ________ option can be exercised only on its expiration date, whereas a/an ________
option can be exercised anytime between the date of writing up to and including the exercise
date.
A) American; European
B) American; British
C) Asian; American
D) European; American
6) A call option whose exercise price exceeds the spot price is said to be:
A) in-the-money.
B) at-the-money.
C) out-of-the-money.
D) over-the-spot.
7) A call option whose exercise price is less than the spot price is said to be:
A) in-the-money.
B) at-the-money.
C) out-of-the-money.
D) under-the-spot.
8) An option whose exercise price is equal to the spot rate is said to be:
A) in-the-money.
B) at-the-money.
C) out-of-the-money.
D) on-the-spot.
9) The main advantage(s) of over-the-counter foreign currency options over exchange traded
options is (are):
A) expiration dates tailored to the needs of the client.
B) amounts that are tailor made.
C) client desired expiration dates.
D) all of the above
10) As a general statement, it is safe to say that businesses generally use the ________ for
foreign currency option contracts, and individuals and financial institutions typically use the
________.
A) exchange markets; over-the-counter
B) over-the-counter; exchange markets
C) private; government sponsored
D) government sponsored; private
TABLE 7.1
Use the table to answer following question(s).
April 19, 2009, British Pound Option Prices (cents per pound, 62,500 pound contracts).
11) Refer to Table 7.1. What was the closing price of the British pound on April 18, 2009?
A) $1.448/£
B) £1.448/$
C) $14.48/£
D) none of the above
12) Refer to Table 7.1. The exercise price of ________ giving the purchaser the right to sell
pounds in June has a cost per pound of ________ for a total price of ________.
A) 1460; 0.68 cents; $425.00
B) 1440; 1.06 cents; $662.50
C) 1450; 1.02 cents; $637.50
D) 1440; 1.42 cents; $887.50
13) Refer to Table 7.1. The May call option on pounds with a strike price of 1440 mean:
A) $88/£ per contract.
B) $0.88/£.
C) $0.0088/£.
D) none of the above
14) Dash Brevenshure works for the currency trading unit of ING Bank in London. He
speculates that in the coming months the dollar will rise sharply vs. the pound. What should
Dash do to act on his speculation?
A) Buy a call on the pound.
B) Sell a call on the pound.
C) Buy a put on the pound.
D) Sell a put on the pound.
15) A put option on yen is written with a strike price of ¥105.00/$. Which spot price maximizes
your profit if you choose to exercise the option before maturity?
A) ¥100/$
B) ¥105/$
C) ¥110/$
D) ¥115/$