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Indicate whether the statement is true or false.
1. Currency options are only traded on exchanges. That is, there is no over-the-counter market for options.
a.
True
b.
False
2. Hedgers should buy puts if they are hedging an expected inflow of foreign currency.
a.
True
b.
False
3. If a currency’s forward rate exhibits a premium, that currency is forced to depreciate.
a.
True
b.
False
4. 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
5. A speculator in futures contracts who expects the value of a foreign currency to depreciate would likely sell futures
contracts.
a.
True
b.
False
6. 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
7. 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
8. Futures contracts are standardized with respect to delivery date and the futures price specified for the settlement date.
a.
True
b.
False
9. If a currency’s forward rate exhibits a discount, the currency is forced to appreciate.
a.
True
b.
False
10. 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
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11. 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
12. Hedgers should buy calls if they are hedging an expected outflow of foreign currency.
a.
True
b.
False
13. The highest amount a buyer of a call or a put option can lose is the exercise price.
a.
True
b.
False
14. An advantage of a short straddle is that it provides the option writer with income from two separate sources.
a.
True
b.
False
15. 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
16. 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
17. Forward contracts are usually negotiated with a commercial bank, while futures contracts are traded on an organized
exchange.
a.
True
b.
False
18. Forward contracts are the best technique for managing exposure arising from project bidding.
a.
True
b.
False
19. If an MNC desires to offset a forward contract that it previously created, it can simply ignore its obligation.
a.
True
b.
False
20. 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
b.
False
21. Futures and options are available for cross rates.
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a.
True
b.
False
22. Margin is used in the forward market to mitigate default risk.
a.
True
b.
False
23. 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
24. 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
25. 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
26. 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
27. The price of a futures contract will generally vary significantly from that of a forward contract.
a.
True
b.
False
28. 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.
a.
True
b.
False
29. A straddle involves the purchase of either two call or two put options at the same exercise price.
a.
True
b.
False
30. The option exchanges in the United States are regulated by the Consumer Finance Protection Bureau and the Federal
Trade Commission.
a.
True
b.
False
31. The currency futures markets are regulated by the International Monetary Fund.
a.
True
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b.
False
32. Options can be traded on an exchange or over the counter.
a.
True
b.
False
33. 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
34. A straddle is a speculative strategy that involves the purchase of both a call and a put.
a.
True
b.
False
35. 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
36. Since corporations have specialized needs, they usually prefer futures contracts to forward contracts for hedging
purposes.
a.
True
b.
False
37. 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
38. Forward contracts are usually liquidated by actual delivery of the currency, while futures contracts are usually
liquidated by offsetting transactions.
a.
True
b.
False
39. 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
40. Due to put-call parity, we can use the same formula to price calls and puts.
a.
True
b.
False
41. 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
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b.
False
42. An option writer is the seller of a call or a put option.
a.
True
b.
False
43. A straddle can only be achieved if the exercise prices of put and call options are the same.
a.
True
b.
False
44. 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
45. 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
46. It is possible to have an opportunity loss when using futures to hedge.
a.
True
b.
False
47. American-style options can be exercised any time up to maturity.
a.
True
b.
False
48. If a currency call option is in the money, then the present exchange rate exceeds the strike price.
a.
True
b.
False
49. Managers of MNCs are typically expected to use currency derivatives for speculation in order to improve profits.
a.
True
b.
False
50. There are no transactions costs associated with trading futures or options.
a.
True
b.
False
51. 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
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52. 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
53. 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
54. Non-deliverable forward contracts (NDFs) are frequently used for currencies in emerging markets.
a.
True
b.
False
55. 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
56. 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
57. 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
58. 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
59. 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
60. The forward premium is the price specified in a call or put option.
a.
True
b.
False
61. 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
62. The writer of a currency call option is obligated to buy the currency if the option is exercised.
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a.
True
b.
False
Indicate the answer choice that best completes the statement or answers the question.
63. 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
64. Which of the following is the most likely strategy for a U.S. firm that will be receiving 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.
Sell a futures contract on francs.
c.
Obtain a forward contract to purchase francs forward.
d.
All of the above are appropriate strategies for the scenario described.
65. 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.
66. The spot rate of the British pound is quoted at $1.49. The 90-day forward rate exhibits a 2 percent discount. What is
the 90-day forward rate of the pound?
a.
$1.52
b.
$1.61
c.
$1.37
d.
$1.46
67. 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
68. The 90-day forward rate for the euro is $1.07, while the current spot rate of the euro is $1.05. What is the annualized
forward premium or discount of the euro?
a.
1.9 percent discount
b.
1.9 percent premium
c.
7.6 percent premium
d.
7.6 percent discount
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69. When the futures price on euros is below the forward rate on euros for the same settlement date, astute investors may
attempt to simultaneously ____ euros forward and ____ euro futures.
a.
sell; sell
b.
buy; sell
c.
sell; buy
d.
buy; buy
70. 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 these are correct; there is no relation between the futures and forward prices.
71. 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.
call options; forward contracts
72. 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 these are correct.
73. 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 these are correct.
74. 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 these are correct.
75. 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
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b.
$46,900
c.
$44,100
d.
$36,400
76. The one-year forward rate of the British pound is quoted at $1.60, and the spot rate of the British pound is quoted at
$1.63. The forward ____ is ____ percent.
a.
discount; 1.9
b.
discount; 1.8
c.
premium; 1.9
d.
premium; 1.8
77. 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.
78. 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.
79. 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.
100,000.00
c.
48,000.00
d.
87,062.50
80. Which of the following is true regarding the currency options market?
a.
Hedgers and speculators both use currency options to attempt to lower risk.
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 these are correct.
81. Which of the following are most commonly traded on an exchange?
a.
forward contracts
b.
futures contracts
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c.
currencies
d.
None of these are correct.
82. 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 these are correct.
83. 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.
84. 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.
85. 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.
86. 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
87. 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
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c.
increase substantially
d.
stay the same
88. 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.
89. Which of the following would result in a profit on 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 these would result in a profit when the euro depreciates.
90. 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 these are correct.
91. 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 being equal.
a.
greater; greater
b.
greater; lower
c.
lower; lower
d.
lower; greater
92. 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 these are correct.
93. The ____ the existing spot price relative to the strike price, the ____ valuable a call option will be.
a.
higher; less
b.
higher; more
c.
lower; less
d.
lower; more
94. Which of the following is not true regarding futures contracts?
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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.
95. 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
96. The spot rate for the Singapore dollar is $.588. The 30-day forward rate is $.590. The forward rate contains an
annualized ____ of ____ percent.
a.
discount; −4.07
b.
premium; 4.07
c.
discount; −4.08
d.
premium; 4.08
e.
premium; 3.40
97. When the existing spot rate exceeds the exercise price, a call option is ____, and a put option is ____.
a.
out of the money; in the money
b.
out of the money; out of the money
c.
in the money; in the money
d.
in the money; out of the money
98. A U.S. corporation has purchased currency put options to hedge a 100,000 Canadian dollar (C$) 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
99. Forward contracts contain:
a.
a commitment to the owner, and are standardized.
b.
a commitment to the owner, and can be tailored to the owner’s desire.
c.
a right but not a commitment to the owner, and can be tailored to the owner’s desire.
d.
a right but not a commitment to the owner, and are standardized.
100. The ____ the existing spot price relative to the strike price, the ____ valuable a put option will be.
a.
higher; less
b.
higher; more
c.
lower; less
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d.
lower; more
101. Currency options are commonly traded through the ____ system.
a.
Robot
b.
Euro
c.
Globex
d.
Scope
102. 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
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.
103. If you have bought the right to sell, you are a:
a.
call writer.
b.
put buyer.
c.
futures buyer.
d.
put writer.
104. 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
105. 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
106. If the observed put option premium is less than what is suggested by the put-call parity equation, astute speculators
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
107. The premium on a pound put option is $.03 per unit. The exercise price is $1.60. The break-even point is ____ for the
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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 these are correct.
108. 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
109. 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
110. Which of the following is true?
a.
Most forward contracts between firms and banks are for speculative purposes.
b.
A security deposit is not required for futures contracts.
c.
The forward contracts offered by banks have maturities for only four possible dates in the future.
d.
None of these are correct.
111. 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
112. 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 percent
b.
discount; about 6 percent
c.
discount; about 6.45 percent
d.
premium; about 6.45 percent
113. 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.
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b.
−$.02.
c.
−$.01.
d.
$.02.
e.
None of these are correct.
114. 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
115. 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
116. 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 put 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
117. 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 these are correct.
118. 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 these are correct.
119. 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.