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b.
out of the money.
c.
at the money.
d.
at a discount.
120. Which of the following is the most unlikely strategy for a U.S. firm that will be purchasing 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.
Obtain a forward contract to purchase francs forward.
c.
Sell a futures contract on francs.
d.
All of these are appropriate strategies for the scenario described.
121. Which of the following is not an instrument used by U.S.-based MNCs to cover their foreign currency positions?
a.
forward contracts
b.
futures contracts
c.
non-deliverable forward contracts
d.
options
e.
All of these are instruments used to cover foreign currency positions.
122. Frank is an option speculator. He anticipates the Danish kroner will appreciate from its current level of $.19 to $.21.
Currently, kroner call options are available with an exercise price of $.18 and a premium of $.02. Should Frank attempt to
buy this option? If the future spot rate of the Danish kroner is indeed $.21, what is his profit or loss per unit?
a.
no; −$.01
b.
yes; $.01
c.
yes; −$.01
d.
yes; $.03
123. Thornton, Inc. needs to invest 5 million Nepalese rupees in its Nepalese subsidiary to support local operations.
Thornton would like its subsidiary to repay the rupees in one year. Thornton would like to engage in a swap transaction.
Thus, Thornton would:
a.
convert the rupees to dollars in the spot market today and convert rupees to dollars in one year at today’s
forward rate.
b.
convert the dollars to rupees in the spot market today and convert dollars to rupees in one year at the
prevailing spot rate.
c.
convert the dollars to rupees in the spot market today and convert rupees to dollars in one year at today’s
forward rate.
d.
convert the dollars to rupees in the spot market today and convert rupees to dollars in one year at the
prevailing spot rate.
124. Which of the following is true?
a.
The futures market is used for both hedging and speculating while the forward market is primarily used for
hedging.
b.
The futures market is used for both hedging and speculating while the forward market is primarily used for
speculating.
c.
Both the futures market and the forward market are primarily used for speculating.
d.
The futures market is primarily used for hedgingwhile the forward market is used for speculating.
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125. In the United States, the typical currency futures contract is based on a currency value in terms of:
a.
euros.
b.
U.S. dollars.
c.
British pounds.
d.
Canadian dollars.
126. 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
127. 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 these are correct.
128. 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.
129. Currency options sold through an options exchange 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.
130. Which of the following is not true regarding currency 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 these are true.
131. The greater the variability of a currency, the ____ will be the premium of a call option on this currency, and the ____
will be the premium of a put option on this currency, other things being equal.
a.
greater; lower
b.
greater; greater
c.
lower; greater
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d.
lower; lower
132. 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 these are correct.
133. 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
134. The premium of a currency put option should decrease if:
a.
the volatility of the underlying asset increases.
b.
the spot rate increases.
c.
the volatility of the underlying asset increases and the spot rate increases.
d.
None of these are correct.
135. 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
c.
strangle; selling a put option and selling a call option
d.
straddle; selling a put option and purchasing a call option
136. 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.
137. A call option on Australian dollars has a strike (exercise) price of $.56. The present exchange rate is $.59. 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
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138. Carl is an option writer. In anticipation of a depreciation of the British pound from its current level of $1.50 to $1.45,
he has written a call option with an exercise price of $1.51 and a premium of $.02. If the spot rate at the option’s maturity
turns out to be $1.54, what is Carl’s profit or loss per unit (assuming the buyer of the option acts rationally)?
a.
−$.01
b.
$.01
c.
−$.04
d.
$.04
e.
−$.03
139. 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
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.
140. The premium of a currency put option should increase if:
a.
the volatility of the underlying asset increases.
b.
the spot rate increases.
c.
the volatility of the underlying asset increases AND the spot rate increases.
d.
None of these are correct.
141. Johnson, Inc., a U.S.-based MNC, will need 10 million Thai baht on August 1. It is now May 1. Johnson has
negotiated a non-deliverable forward contract with its bank. The reference rate is the baht’s closing exchange rate (in $)
quoted by Thailand’s central bank in 90 days. The baht’s spot rate today is $.02. If the rate quoted by Thailand’s central
bank on August 1 is $.022, Johnson will ____ $____.
a.
pay; 20,000
b.
be paid; 20,000
c.
pay; 2,000
d.
be paid; 2,000
e.
None of these are correct.
142. Kalons, Inc. is a U.S.-based MNC that frequently imports raw materials from Canada. Kalons is typically invoiced
for these goods in Canadian dollars and is concerned that the Canadian dollar will appreciate in the near future. Which of
the following is not an appropriate hedging technique under these circumstances?
a.
Purchase Canadian dollars forward.
b.
Purchase Canadian dollar futures contracts.
c.
Purchase Canadian dollar put options.
d.
Purchase Canadian dollar call options.
143. Assume the spot rate of a currency is $.37 and the 90-day forward rate is $.36. The forward rate of this currency
exhibits a ____ of ____ on an annualized basis.
a.
discount; 11.11 percent
b.
premium; 11.11 percent
c.
premium; 10.81 percent
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d.
discount; 10.81 percent
144. A put option on British pounds has a strike (exercise) price of $1.48. The present exchange rate is $1.55. 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.
145. If your firm expects the euro to substantially depreciate, it could speculate by ____ euro call options or ____ euros
forward in the forward exchange market.
a.
selling; selling
b.
selling; purchasing
c.
purchasing; purchasing
d.
purchasing; selling
146. When currency options are not standardized and are traded over-the-counter, there is ____ liquidity and a ____
bid/ask spread.
a.
less; narrower
b.
more; narrower
c.
more; wider
d.
less; wider
147. 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
b.
$46,900
c.
$44,100
d.
$36,400
148. A U.S. firm is bidding for a project needed by the Swiss government. The firm will not know if the bid is accepted
until three months from now. The firm will need Swiss francs to cover expenses but will be paid by the Swiss government
in dollars if it is hired for the project. The firm can best insulate itself against exchange rate exposure by:
a.
selling futures in francs.
b.
buying futures in francs.
c.
buying franc put options.
d.
buying franc call options.
149. Currency futures contracts sold on an exchange 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.
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150. 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.
151. A put option on British pounds has a strike (exercise) price of $1.57. The present exchange rate is $1.53. 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.
152. Graylon, Inc., based in Washington, exports products to a German firm and will receive payment of €200,000 in
three months. On June 1, the spot rate of the euro was $1.12, and the 3-month forward rate was $1.10. On June 1, Graylon
negotiated a forward contract with a bank to sell €200,000 forward in three months. The spot rate of the euro on
September 1 is $1.15. Graylon will receive $____ for the euros.
a.
224,000
b.
220,000
c.
200,000
d.
230,000
153. A call 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 call 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
154. 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.
155. Which of the following is correct?
a.
The longer the time to maturity, the lower the value of a currency call option, other things being equal.
b.
The longer the time to maturity, the lower the value of a currency put option, other things being equal.
c.
The higher the spot rate relative to the exercise price, the greater the value of a currency put option, other
things being equal.
d.
The lower the exercise price relative to the spot rate, the greater the value of a currency call option, other
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things being equal.
156. The spot rate of the euro is quoted at $1.29. The annualized forward premium on the euro is 10 percent. What is the
30-day forward rate of the euro?
a.
$1.28
b.
$1.30
c.
$1.42
d.
$1.16
157. When the futures price is equal to the spot rate of a given currency, and the foreign country exhibits a higher interest
rate than the U.S. interest rate, astute investors may attempt to simultaneously ____ the foreign currency, invest it in the
foreign country, and ____ futures in the foreign currency.
a.
buy; buy
b.
sell; buy
c.
buy; sell
d.
buy; buy
158. You are a speculator who sells a call option on Swiss francs for a premium of $.06, with an exercise price of $.64.
The option will not be exercised until the expiration date, if at all. If the spot rate of the Swiss franc is $.69 on the
expiration date, your net profit per unit, assuming that you have to buy Swiss francs in the market to fulfill your
obligation, is:
a.
−$.02.
b.
−$.01.
c.
$.01.
d.
$.02.
e.
None of these are correct.
159. Which of the following is not true regarding currency 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.
160. A firm wants to use an option to hedge 12.5 million in receivables from New Zealand firms. The premium is $.03.
The exercise price is $.55. If the option is exercised, what is the total amount of dollars received (after accounting for the
premium paid)?
a.
$6,875,000
b.
$7,250,000
c.
$7,000,000
d.
$6,500,000
e.
None of these are correct.
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Answer Key
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52. False
53. True
54. True
55. False
56. False
57. True
58. False
59. True
60. False
61. True
62. False
63. a
64. b
65. b
66. d
67. c
68. c
69. c
70. c
71. d
72. e
73. b
74. b
75. d
76. b
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103. b
104. d
105. a
106. b
107. e
108. c
109. b
110. d
111. d
112. d
113. b
114. d
115. d
116. c
117. d
118. e
119. a
120. c
121. e
122. b
123. c
124. a
125. b
126. a
127. d
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154. d
155. d
156. b
157. c
158. c
159. d
160. d