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 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
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 represents 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.
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. 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
92. Hedgers should buy puts if they are hedging an expected inflow of foreign currency.
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.
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 crossrates.
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 uncovered call can experience a loss limited to the option premium.
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.
one, three, six, and twelve months.
b.
one, three, six, and twelve years.
c.
two, three, and five years.
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% premium
b.
7.46% discount
c.
7.75% premium
d.
7.75% discount
106. 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?
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
b.
premium; 18.18
c.
discount; 15.38
d.
premium; 15.38
108. The spot rate of 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 spot rate of 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
110. 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
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 is $1.52. The spot rate
at the time of this option expiration is expected to be $1.51. The 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
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%
premium. Assume there are no transaction costs. What is the 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 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
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
exercise price of call and put options are the same. The most appropriate method for speculation is
____and it may be achieved by ____.
a.
straddle; purchase put option and purchase call option.
b.
strangle; purchase put option and sell call option.
c.
strangle; sell put option and sell put option.
d.
straddle; sell put option and buy call option.
122. 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.
123. 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
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) are frequently used for currencies in emerging markets.
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 expecting the value of a foreign currency to depreciate would likely
sell futures contracts.
a. True
b. False
136. Currency options are only traded on exchanges. That is, there is no over-the-counter market for
options.
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. 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
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 represents 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. 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
145. 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
146. 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
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
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 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.
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 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.
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. 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
162. 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.
163. 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