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Chapter 05: Currency Derivatives
of this option expiration is expected to be $1.51. Speculators could profit by:
a.
writing a put option.
b.
buying a put option.
c.
buying a call option
d.
writing a call option and buying a call option simultaneously.
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:
a.
in the money.
b.
out of the money.
c.
at the money.
d.
at a discount.
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:
a.
in the money.
b.
out of the money.
c.
at the money.
d.
at a discount.
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
Chapter 05: Currency Derivatives
best possible hedging strategy and how many U.S. dollars Crown Co. will receive under this strategy?
a.
Buy a put option and receive $150,000.
b.
Sell pounds forward and receive $155,000.
c.
Sell a call option and receive $156,000.
d.
Sell a put option and receive $157,000.
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?
a.
Purchase euro put options.
b.
Sell euros forward.
c.
Sell euro futures contracts.
d.
Sell euro put options.
118. The ____ the existing spot price relative to the strike price, the ____ valuable the call options will be.
a.
higher; less
b.
higher; more
c.
lower; less
d.
lower; more
119. 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
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.
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
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 ____.
a.
straddle; purchasing a put option and purchasing a call option.
b.
strangle; purchasing a put option and selling a call option.
Chapter 05: Currency Derivatives
c.
strangle; selling a put option and selling a call option.
d.
straddle; selling a put option and purchasing a call option.
122. Which of the following does not represent the risk from using forward contracts?
a.
A forward contract is used to hedge receivables, and the spot exchange rate at the expiration of the contract
exceeds the contract price.
b.
A forward contract is used to hedge receivables, and the spot exchange rate at the time of expiration of the
contract is lower than the contract price.
c.
A forward contract is used to hedge payables, and the spot exchange rate at the time of expiration of the
contract is lower than the contract price.
d.
A forward contract is used to hedge payables or receivables and the amount to be received or paid is canceled.
123. The writer of a put option has a right, but not an obligation, to buy the underlying currency from the option buyer.
a.
True
b.
False
124. A straddle can only be achieved if the exercise prices of put and call options are the same.
a.
True
b.
False
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.
a.
True
b.
False
126. Hedgers should buy calls if they are hedging an expected outflow of foreign currency.
a.
True
b.
False
127. If a currency's forward rate exhibits a discount, the currency is forced to appreciate.
a.
True
b.
False
128. If a currency's forward rate exhibits a premium, that currency is forced to depreciate.
a.
True
b.
False
129. If a currency call option is in the money, then the present exchange rate exceeds the strike price.
a.
True
b.
False
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.
a.
True
b.
False
131. If an MNC desires to offset a forward contract that it previously created, it can simply ignore its obligation.
a.
True
b.
False
132. Non-deliverable forward contracts (NDFs) can be used to hedge existing positions in foreign currencies that are not
convertible into dollars.
a.
True
b.
False
133. Forward contracts are usually negotiated with a commercial bank, while futures contracts are traded on an organized
exchange.
a.
True
b.
False
134. Since corporations have specialized needs, they usually prefer futures contracts to forward contracts for hedging
purposes.
a.
True
b.
False
135. A speculator in futures contracts who expects the value of a foreign currency to depreciate would likely sell futures
contracts.
a.
True
b.
False
136. The option exchanges in the United States are regulated by the Consumer Finance Protection Bureau and the Federal
Trade Commission.
a.
True
b.
False
137. 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
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.
a.
True
b.
False
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.
a.
True
b.
False
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.
a.
True
b.
False
Chapter 05: Currency Derivatives
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.
a.
True
b.
False
142. A straddle involves the purchase of either two call or two put options at the same exercise price.
a.
True
b.
False
143. A European option can be exercised at any time prior to maturity, while an American option can only be exercised at
maturity.
a.
True
b.
False
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.
Chapter 05: Currency Derivatives
a.
True
b.
False
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.
a.
True
b.
False
146. The choice of a basic versus a conditional option depends on expectations about the currency’s exchange rate over
the period of concern.
a.
True
b.
False
147. An advantage of a short straddle is that it provides the option writer with income from two separate sources.
a.
True
b.
False
148. The disadvantage of a long strangle relative to a long straddle is that the underlying currency has to fluctuate more
prior to expiration.
a.
True
b.
False
149. With a bull spread, the spreader believes that the underlying currency will appreciate substantially, even more so than
with a strangle.
a.
True
b.
False
150. 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
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 $____.
a.
1.50
b.
1.47
c.
1.55
d.
1.46
e.
None of the above
Chapter 05: Currency Derivatives
152. 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.
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.
a.
upward; downward
b.
upward; upward
c.
downward; upward
d.
downward; downward
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.
a.
39,062.50
b.
100,000
c.
48,000
d.
87,062.50
155. Which of the following would result in a profit on 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.
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.
a.
buy; buy
b.
sell; sell
c.
buy; sell
d.
sell; buy
157. Which of the following is true regarding options?
a.
Options are only traded over-the-counter.
b.
Speculators sell at-the-money put options when they expect that the currency’s value will rise.
c.
Speculators purchase at-the-money call options when they expect that the currency’s value will fall.
d.
Speculators sell at-the-money currency call options when they expect that the currency’s value will rise.
158. 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
159. 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
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?
a.
$33,600
b.
$46,900
c.
$44,100
d.
$36,400
161. 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.
