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Chapter 05: Currency Derivatives
b.
The currency options offered by commercial banks are more liquid and have a smaller bid/ask spread than the
options traded on an exchange.
c.
When transaction costs are controlled for, the currency options market is efficient.
d.
all of the above
60. The premium of a currency put option should increase if:
a.
the volatility of the underlying asset increases.
b.
the spot rate increases.
c.
A and B.
d.
none of the above
61. 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.
62. 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 that expect to buy foreign currency to finance foreign subsidiaries.
c.
Corporations that expect to collect on a foreign account receivable in one month.
d.
all of the above
63. If you have bought the right to sell, you are a:
a.
call writer.
b.
put buyer.
c.
futures buyer.
d.
put writer.
64. If you have an options position in which you might be obligated to buy euros, you are a:
a.
call writer.
b.
put writer.
c.
put buyer.
d.
futures seller.
65. Which of the following is true for futures, but not for forwards?
a.
actual delivery
b.
no transactions costs
c.
self-regulating market
d.
none of the above
66. 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.
67. The spot rate for the Singapore dollar is $.588. The 30-day forward rate is $.590. The forward rate contains an
annualized ____ of ____ percent.
a.
discount; −4.07
b.
premium; 4.07
c.
discount; −4.08
d.
premium; 4.08
e.
premium; 3.40
68. Non-deliverable forward contracts (NDFs) are frequently used for currencies in emerging markets.
a.
True
b.
False
69. The price of a futures contract will generally vary significantly from that of a forward contract.
a.
True
b.
False
70. If the futures rate is lower than the forward rate, astute investors would attempt to simultaneously buy futures and sell
forward. Such actions would place downward pressure on the futures price and upward pressure on the forward rate.
a.
True
b.
False
71. Forward contracts are usually liquidated by actual delivery of the currency, while futures contracts are usually
liquidated by offsetting transactions.
a.
True
b.
False
72. 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
73. 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
74. Currency options are only traded on exchanges. That is, there is no over-the-counter market for options.
a.
True
b.
False
75. 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.
a.
True
b.
False
76. The writer of a call option is obligated to sell the underlying currency to the buyer of the option if the option is
exercised.
a.
True
b.
False
77. The lower bound of the call option premium is the greater of zero and the difference between the spot rate and the
exercise price; the upper bound of a currency call option is the spot rate.
a.
True
b.
False
78. The lower bound of a put option premium is the greater of zero and the difference between the exercise price and the
spot rate; the upper bound of a currency put option is the exercise price.
a.
True
b.
False
79. Due to put-call parity, we can use the same formula to price calls and puts.
a.
True
b.
False
80. If an actual put option premium is less than what is suggested by the put-call parity relationship, arbitrage can be
conducted.
a.
True
b.
False
81. 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
82. Futures contracts are standardized with respect to delivery date and the futures price specified for the settlement date.
a.
True
b.
False
83. If an investor who has previously purchased a futures contract wishes to liquidate her position, she would sell an
identical futures contract with the same settlement date.
a.
True
b.
False
84. Margin requirements require investors in futures contracts to make deposits with their respective brokerage firms
when they take their position. The deposits are intended to minimize the credit risk associated with futures contracts.
a.
True
Chapter 05: Currency Derivatives
b.
False
85. 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
86. The highest amount a buyer of a call or a put option can lose is the exercise price.
a.
True
b.
False
87. A straddle is a speculative strategy that involves the purchase of both a call and a put.
a.
True
b.
False
88. A currency put option is a contract specifying a standard volume of a particular currency to be exchanged on a specific
settlement date.
Chapter 05: Currency Derivatives
a.
True
b.
False
89. An option writer is the seller of a call or a put option.
a.
True
b.
False
90. The forward premium is the price specified in a call or put option.
a.
True
b.
False
91. The forward premium is the price specified in a call or put option.
a.
True
b.
False
92. Hedgers should buy puts if they are hedging an expected inflow of foreign currency.
Chapter 05: Currency Derivatives
a.
True
b.
False
93. Forward contracts are the best technique for managing exposure arising from project bidding.
a.
True
b.
False
94. The currency futures markets are regulated by the International Monetary Fund.
a.
True
b.
False
95. It is possible to have an opportunity loss when using futures to hedge.
a.
True
b.
False
96. Margin is used in the forward market to mitigate default risk.
Chapter 05: Currency Derivatives
a.
True
b.
False
97. There are no transactions costs associated with trading futures or options.
a.
True
b.
False
98. Futures and options are available for cross rates.
a.
True
b.
False
99. Options can be traded on an exchange or over the counter
a.
True
b.
False
100. The writer of an currency call option is obligated to buy the currency if the option is exercised.
Chapter 05: Currency Derivatives
a.
True
b.
False
101. American-style options can be exercised any time up to maturity.
a.
True
b.
False
102. 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
103. As mentioned in the text, the most common maturities for forward rates are:
a.
30, 60, 90, 180, and 360 days.
b.
one, three, six, and twelve years.
c.
5, 30, and 360 days.
d.
two, three, and five weeks
104. Managers of MNCs are typically expected to use currency derivatives for speculation in order to improve profits.
a.
True
b.
False
105. 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 percent premium
b.
7.46 percent discount
c.
7.75 percent premium
d.
7.75 percent discount
106. The annualized forward premium on the euro is 7 percent. What is the 90-day forward rate on the euro if the spot rate
today is $1.25?
a.
$1.27
b.
$1.34
c.
$1.16
d.
$1.23
107. The one-year forward rate of the Japanese yen is quoted at $.013, and the spot rate of Japanese yen is quoted at
$.011. The forward ____ is ____ percent.
a.
discount; 18.18
Chapter 05: Currency Derivatives
b.
premium; 18.18
c.
discount; 15.38
d.
premium; 15.38
108. The spot rate of the British pound is quoted at $1.49. The 90-day forward rate exhibits a 2% discount. What is the 90-
day forward rate of the pound?
a.
$1.52
b.
$1.61
c.
$1.37
d.
$1.46
109. 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
110. The spot rate of the euro is quoted at $1.29. The annualized forward premium on the euro is 10%. What is the 30-day
forward rate of the euro?
a.
$1.28
b.
$1.30
c.
$1.42
d.
$1.16
111. 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.
112. If you have bought a right to buy foreign currency, you are:
a.
a call writer.
b.
a call buyer.
c.
a put writer.
d.
a put buyer.
113. The premium on a pound put option is $.04. The spot rate and the exercise price are $1.52. The spot rate at the time
