Multinational Business Finance 13th Edition Test Bank Chapter 8

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Multinational Business Finance, 13e (Eiteman/Stonehill/Moffett)

Chapter 8 Foreign Currency Derivatives and Swaps

8.1 Foreign Currency Futures

Multiple Choice

Question: Financial derivatives are powerful tools that can be used by management for

purposes of:

A) speculation.

B) hedging.

C) human resource management.

D) A and B above

Answer:

Question: A foreign currency ________ contract calls for the future delivery of a standard

amount of foreign exchange at a fixed time, place, and price.

A) futures

B) forward

C) option

D) swap

Answer:

Question: Which of the following is NOT a contract specification for currency futures

trading on an organized exchange?

A) size of the contract

B) maturity date

C) last trading day

D) All of the above are specified.

Answer:

Question: About ________ of all futures contracts are settled by physical delivery of

foreign exchange between buyer and seller.

A) 0%

B) 5%

C) 50%

D) 95%

Answer:

Question: Futures contracts require that the purchaser deposit an initial sum as collateral.

This deposit is called a:

A) collateralized deposit.

B) marked market sum.

C) margin.

D) settlement.

Answer:

Question: A speculator in the futures market wishing to lock in a price at which they could

________ a foreign currency will ________ a futures contract.

A) buy; sell

B) sell; buy

C) buy; buy

D) none of the above

Answer:

Question: A speculator that has ________ a futures contract has taken a ________

position.

A) sold; long

B) purchased; short

C) sold; short

D) purchased; sold

Answer:

Question: Peter Simpson thinks that the U.K. pound will cost $1.43/ in six months. A

6-month currency futures contract is available today at a rate of $1.44/. If Peter was to

speculate in the currency futures market, and his expectations are correct, which of the

following strategies would earn him a profit?

A) Sell a pound currency futures contract.

B) Buy a pound currency futures contract.

C) Sell pounds today.

D) Sell pounds in six months.

Answer:

Question: Jack Hemmings bought a 3-month British pound futures contract for $1.4400/

only to see the dollar appreciate to a value of $1.4250 at which time he sold the pound

futures. If each pound futures contract is for an amount of 62,500, how much money did

Jack gain or lose from his speculation with pound futures?

A) $937.50 loss

B) $937.50 gain

C) 937.50 loss

D) 937.50 gain

Answer:

Question: Which of the following statements regarding currency futures contracts and

forward contracts is NOT true?

A) A futures contract is a standardized amount per currency whereas the forward contact is

for any size desired.

B) A futures contract is for a fixed maturity whereas the forward contract is for any

maturity you like up to one year.

C) Futures contracts trade on organized exchanges whereas forwards take place between

individuals and banks with other banks via telecom linkages.

D) All of the above are true.

Answer:

Question: Which of the following is NOT a difference between a currency futures contract

and a forward contract?

A) The futures contract is marked to market daily, whereas the forward contract is only due

to be settled at maturity.

B) The counterparty to the futures participant is unknown with the clearinghouse stepping

into each transaction, whereas the forward contract participants are in direct contact setting

the forward specifications.

C) A single sales commission covers both the purchase and sale of a futures contract,

whereas there is no specific sales commission with a forward contract because banks earn

a profit through the bid-ask spread.

D) All of the above are true.

Answer:

Question: A foreign currency ________ gives the purchaser the right, not the obligation, to

buy a given amount of foreign exchange at a fixed price per unit for a specified period.

A) future

B) forward

C) option

D) swap

Answer:

Question: A foreign currency ________ option gives the holder the right to ________ a

foreign currency, whereas a foreign currency ________ option gives the holder the right to

________ an option.

A) call, buy, put, sell

B) call, sell, put, buy

C) put, hold, call, release

D) none of the above

Answer:

Question: The price at which an option can be exercised is called the:

A) premium.

B) spot rate.

C) strike price.

D) commission.

Answer:

Question: An ________ option can be exercised only on its expiration date, whereas a/an

________ option can be exercised anytime between the date of writing up to and including

the exercise date.

A) American; European

B) American; British

C) Asian; American

D) European; American

Answer:

Question: An ________ option can be exercised only on its expiration date, whereas a/an

________ option can be exercised anytime between the date of writing up to and including

the exercise date.

A) American; European

B) American; British

C) Asian; American

D) European; American

Answer:

Question: A call option whose exercise price exceeds the spot price is said to be:

A) in-the-money.

B) at-the-money.

C) out-of-the-money.

D) over-the-spot.

Answer:

Question: A call option whose exercise price is less than the spot price is said to be:

A) in-the-money.

B) at-the-money.

C) out-of-the-money.

D) under-the-spot.

Answer:

Question: An option whose exercise price is equal to the spot rate is said to be:

A) in-the-money.

B) at-the-money.

C) out-of-the-money.

D) on-the-spot.

Answer:

Question: The main advantage(s) of over-the-counter foreign currency options over

exchange traded options is (are):

A) expiration dates tailored to the needs of the client.

B) amounts that are tailor made.

C) client desired expiration dates.

D) all of the above

Answer:

Question: As a general statement, it is safe to say that businesses generally use the

________ for foreign currency option contracts, and individuals and financial institutions

typically use the ________.

A) exchange markets; over-the-counter

B) over-the-counter; exchange markets

C) private; government sponsored

D) government sponsored; private

Answer:

Question: Refer to Table 8.1. What was the closing price of the British pound on April 18,

2009?

A) $1.448/

B) 1.448/$

C) $14.48/

D) none of the above

Answer:

Question: Refer to Table 8.1. The exercise price of ________ giving the purchaser the right

to sell pounds in June has a cost per pound of ________ for a total price of ________.

A) 1460; 0.68 cents; $425.00

B) 1440; 1.06 cents; $662.50

C) 1450; 1.02 cents; $637.50

D) 1440; 1.42 cents; $887.50

Answer:

Question: Refer to Table 8.1. The May call option on pounds with a strike price of 1440

mean:

A) $88/ per contract.

B) $0.88/.

C) $0.0088/.

D) none of the above

Answer:

Question: Dash Brevenshure works for the currency trading unit of ING Bank in London.

He speculates that in the coming months the dollar will rise sharply vs. the pound. What

should Dash do to act on his speculation?

A) Buy a call on the pound.

B) Sell a call on the pound.

C) Buy a put on the pound.

D) Sell a put on the pound.

Answer:

Question: A put option on yen is written with a strike price of 105.00/$. Which spot price

maximizes your profit if you choose to exercise the option before maturity?

A) 100/$

B) 105/$

C) 110/$

D) 115/$

Answer:

Question: A call option on euros is written with a strike price of $1.30/euro. Which spot

price maximizes your profit if you choose to exercise the option before maturity?

A) $1.20/euro

B) $1.25/euro

C) $1.30/euro

D) $1.35/euro

Answer:

Question: A call option on UK pounds has a strike price of $2.05/ and a cost of $0.02.

What is the break-even price for the option?

A) $2.03/

B) $2.07/

C) $2.05/

D) The answer depends upon if this is a long or a short call option.

Answer:

Question: Your U.S firm has an accounts payable denominated in UK pounds due in 6

months. To protect yourself against unexpected changes in the dollar/pound exchange rate

you should:

A) buy a pound put option.

B) sell a pound put option.

C) buy a pound call option.

D) sell a pound call option.

Answer:

Question: Jasper Pernik is a currency speculator who enjoys “betting” on changes in the

foreign currency exchange market. Currently the spot price for the Japanese yen is

129.87/$ and the 6-month forward rate is 128.53/$. Jasper thinks the yen will move to

128.00/$ in the next six months. Jasper should ________ at ________ to profit from

changing currency values.

A) buy yen; the forward rate

B) buy dollars; the forward rate

C) sell yen; the forward rate

D) There is not enough information to answer this question.

Answer:

Question: Jasper Pernik is a currency speculator who enjoys “betting” on changes in the

foreign currency exchange market. Currently the spot price for the Japanese yen is

129.87/$ and the 6-month forward rate is 128.53/$. Jasper thinks the yen will move to

128.00/$ in the next six months. If Jasper buys $100,000 worth of yen at todays spot price

and sells within the next six months at 128/$, he will earn a profit of:

A) $146.09

B) $101,460.94

C) $1460.94

D) nothing; he will lose money

Answer:

Question: Jasper Pernik is a currency speculator who enjoys “betting” on changes in the

foreign currency exchange market. Currently the spot price for the Japanese yen is

129.87/$ and the 6-month forward rate is 128.53/$. Jasper thinks the yen will move to

128.00/$ in the next six months. If Jasper buys $100,000 worth of yen at todays spot price

her potential gain is ________ and her potential loss is ________.

A) $100,000; unlimited

B) unlimited; unlimited

C) $100,000; $100,000

D) unlimited; $100,000

Answer:

Question: Jasper Pernik is a currency speculator who enjoys “betting” on changes in the

foreign currency exchange market. Currently the spot price for the Japanese yen is

129.87/$ and the 6-month forward rate is 128.53/$. Jasper thinks the yen will move to

128.00/$ in the next six months. If Jaspers expectations are correct, then he could profit in

the forward market by ________ and then ________.

A) buying yen for 128.00/$; selling yen at 128.53/$

B) buying yen for 128.53/$; selling yen at 128.00/$

C) There is not enough information to answer this question

D) He could not profit in the forward market.

Answer:

Question: The maximum gain for the purchaser of a call option contract is ________ while

the maximum loss is ________.

A) unlimited; the premium paid.

B) the premium paid; unlimited.

C) unlimited; unlimited.

D) unlimited; the value of the underlying asset.

Answer:

Question: The buyer of a long call option:

A) has a maximum loss equal to the premium paid.

B) has a gain equal to but opposite in sign to the writer of the option.

C) has an unlimited maximum gain potential.

D) all of the above

Answer:

Question: Which of the following is NOT true for the writer of a call option?

A) The maximum loss is unlimited.

B) The maximum gain is unlimited.

C) The gain or loss is equal to but of the opposite sign of the buyer of a call option.

D) All of the above are true.

Answer:

Question: Which of the following is NOT true for the writer of a put option?

A) The maximum loss is limited to the strike price of the underlying asset less the

premium.

B) The gain or loss is equal to but of the opposite sign of the buyer of a put option.

C) The maximum gain is the amount of the premium.

D) All of the above are true.

Answer:

Question: The buyer of a long put option:

A) has a maximum loss equal to the premium paid.

B) has a gain equal to but opposite in sign to the writer of the option.

C) has maximum gain potential limited to the difference between the strike price and the

premium paid.

D) all of the above

Answer:

Question: The value of a European style call option is the sum of two components:

A) the present value plus the intrinsic value.

B) the time value plus the present value.

C) the intrinsic value plus the time value.

D) the intrinsic value plus the standard deviation.

Answer:

Question: Currency futures contracts have become standard fare and trade readily in the

world money centers.

Answer:

Question: The major difference between currency futures and forward contracts is that

futures contracts are standardized for ease of trading on an exchange market whereas

forward contracts are specialized and tailored to meet the needs of clients.

Answer:

Question: The writer of the option is referred to as the seller, and the buyer of the option is

referred to as the holder.

Answer:

Question: Foreign currency options are available both over-the-counter and on organized

exchanges.

Answer:

Question: Jasper Pernik is a currency speculator who enjoys “betting” on changes in the

foreign currency exchange market. Currently the spot price for the Japanese yen is

129.87/$ and the 6-month forward rate is 128.53/$. Jasper would earn a higher rate of

return by buying yen and a forward contract than if he had invested her money in 6-month

US Treasury securities at an annual rate of 2.50%.

Answer:

Question: Most option profits and losses are realized through taking actual delivery of the

currency rather than offsetting contracts.

Answer:

Question: Why are foreign currency futures contracts more popular with individuals and

banks while foreign currency forwards are more popular with businesses?

Answer:

Question: Compare and contrast foreign currency options and futures. Identify situations

when you may prefer one vs. the other when speculating on foreign exchange.

Answer:

Question: Which of the following is NOT a factor in determining the premium price of a

currency option?

A) the present spot rate

B) the time to maturity

C) the standard deviation of the daily spot price movement

D) All of the above are factors in determining the premium price.

Answer:

Question: The ________ of an option is the value if the option were to be exercised

immediately. It is the options ________ value.

A) intrinsic value; maximum

B) intrinsic value; minimum

C) time value; maximum

D) time value; minimum

Answer:

Question: Assume that a call option has an exercise price of $1.50/. At a spot price of

$1.45/, the call option has:

A) a time value of $0.04.

B) a time value of $0.00.

C) an intrinsic value of $0.00.

D) an intrinsic value of -$0.04.

Answer:

Question: The single largest interest rate risk of a firm is:

A) interest sensitive securities.

B) debt service.

C) dividend payments.

D) accounts payable.

Answer:

Question: ________ is the possibility that the borrowers creditworthiness is reclassified by

the lender at the time of renewing credit. ________ is the risk of changes in interest rates

charged at the time a financial contract rate is set.

A) Credit risk; Interest rate risk

B) Repricing risk; Credit risk

C) Interest rate risk; Credit risk

D) Credit risk; Repricing risk

Answer:

Question: Refer to Instruction 8.1. Choosing strategy #1 will:

A) guarantee the lowest average annual rate over the next three years.

B) eliminate credit risk but retain repricing risk.

C) maintain the possibility of lower interest costs, but maximizes the combined credit and

repricing risks.

D) preclude the possibility of sharing in lower interest rates over the three-year period.

Answer:

Question: Refer to Instruction 8.1. Choosing strategy #2 will:

A) guarantee the lowest average annual rate over the next three years.

B) eliminate credit risk but retain repricing risk.

C) maintain the possibility of lower interest costs, but maximizes the combined credit and

repricing risks.

D) preclude the possibility of sharing in lower interest rates over the three-year period.

Answer:

Question: Refer to Instruction 8.1. Choosing strategy #3 will:

A) guarantee the lowest average annual rate over the next three years.

B) eliminate credit risk but retain repricing risk.

C) maintain the possibility of lower interest costs, but maximizes the combined credit and

repricing risks.

D) preclude the possibility of sharing in lower interest rates over the three-year period.

Answer:

Question: Refer to Instruction 8.1. Which strategy (strategies) will eliminate credit risk?

A) Strategy #1

B) Strategy #2

C) Strategy #3

D) Strategies #1 and #2

Answer:

Question: Refer to Instruction 8.1. If your firm felt very confident that interest rates would

fall or, at worst, remain at current levels, and were very confident about the firms credit

rating for the next 10 years, which strategy would you likely choose? (Assume your firm is

borrowing money.)

A) Strategy #3

B) Strategy #2

C) Strategy #1

D) Strategy #1, #2, or #3; you are indifferent among the choices.

Answer:

Question: Refer to Instruction 8.1. The risk of strategy #1 is that interest rates might go

down or that your credit rating might improve. The risk of strategy #2 is: (Assume your

firm is borrowing money.)

A) that interest rates might go down or that your credit rating might improve.

B) that interest rates might go up or that your credit rating might improve.

C) that interest rates might go up or that your credit rating might get worse.

D) none of the above

Answer:

Question: Refer to Instruction 8.1. The risk of strategy #1 is that interest rates might go

down or that your credit rating might improve. The risk of strategy #3 is: (Assume your

firm is borrowing money.)

A) that interest rates might go down or that your credit rating might improve.

B) that interest rates might go up or that your credit rating might improve.

C) that interest rates might go up or that your credit rating might get worse.

D) none of the above

Answer:

Question: Refer to Instruction 8.1. After the fact, under which set of circumstances would

you prefer strategy #1? (Assume your firm is borrowing money.)

A) Your credit rating stayed the same and interest rates went up.

B) Your credit rating stayed the same and interest rates went down.

C) Your credit rating improved and interest rates went down.

D) Not enough information to make a judgment.

Answer:

Question: Refer to Instruction 8.1. After the fact, under which set of circumstances would

you prefer strategy #2? (Assume your firm is borrowing money.)

A) Your credit rating stayed the same and interest rates went up.

B) Your credit rating stayed the same and interest rates went down.

C) Your credit rating improved and interest rates went down.

D) Not enough information to make a judgment.

Answer:

Question: Refer to Instruction 8.1. After the fact, under which set of circumstances would

you prefer strategy #3? (Assume your firm is borrowing money.)

A) Your credit rating stayed the same and interest rates went up.

B) Your credit rating stayed the same and interest rates went down.

C) Your credit rating improved and interest rates went down.

D) Not enough information to make a judgment.

Answer:

Question: The time value is asymmetric in value as you move away from the strike price

(i.e., the time value at two cents above the strike price is not necessarily the same as the

time value two cents below the strike price).

Answer:

Question: An interbank-traded contract to buy or sell interest rate payments on a notional

principal is called a/an:

A) forward rate agreement.

B) interest rate future.

C) interest rate swap.

D) none of the above

Answer:

Question: A/an ________ is a contract to lock in today interest rates over a given period of

time.

A) forward rate agreement

B) interest rate future

C) interest rate swap

D) none of the above

Answer:

Question: An agreement to exchange interest payments based on a fixed payment for those

based on a variable rate (or vice versa) is known as a/an:

A) forward rate agreement.

B) interest rate future.

C) interest rate swap.

D) none of the above

Answer:

Question: The financial manager of a firm has a variable rate loan outstanding. If she

wishes to protect the firm against an unfavorable increase in interest rates she could:

A) sell an interest rate futures contract of a similar maturity to the loan.

B) buy an interest rate futures contract of a similar maturity to the loan.

C) swap the adjustable rate loan for another of a different maturity.

D) none of the above

Answer:

Question: An agreement to swap a fixed interest payment for a floating interest payment

would be considered a/an:

A) currency swap.

B) forward swap.

C) interest rate swap.

D) none of the above

Answer:

Question: An agreement to swap the currencies of a debt service obligation would be

termed a/an:

A) currency swap.

B) forward swap.

C) interest rate swap.

D) none of the above

Answer:

Question: Which of the following would be considered an example of a currency swap?

A) exchanging a dollar interest obligation for a British pound obligation

B) exchanging a eurodollar interest obligation for a dollar obligation

C) exchanging a eurodollar interest obligation for a British pound obligation

D) All of the above are examples of a currency swap.

Answer:

Question: A firm with fixed-rate debt that expects interest rates to fall may engage in a

swap agreement to:

A) pay fixed-rate interest and receive floating rate interest.

B) pay floating rate and receive fixed rate.

C) pay fixed rate and receive fixed rate.

D) pay floating rate and receive floating rate.

Answer:

Question: A firm with variable-rate debt that expects interest rates to rise may engage in a

swap agreement to:

A) pay fixed-rate interest and receive floating rate interest.

B) pay floating rate and receive fixed rate.

C) pay fixed rate and receive fixed rate.

D) pay floating rate and receive floating rate.

Answer:

Question: The interest rate swap strategy of a firm with fixed rate debt and that expects

rates to go up is to:

A) do nothing.

B) pay floating and receive fixed.

C) receive floating and pay fixed.

D) none of the above

Answer:

Question: The potential exposure that any individual firm bears that the second party to

any financial contract will be unable to fulfill its obligations under the contract is called:

A) interest rate risk.

B) credit risk.

C) counterparty risk.

D) clearinghouse risk.

Answer:

Question: Which of the following is an unlikely reason for firms to participate in the swap

market?

A) To replace cash flows scheduled in an undesired currency with cash flows in a desired

currency.

B) Firms may raise capital in one currency but desire to repay it in another currency.

C) Firms desire to swap fixed and variable payment or receipt of funds.

D) All of the above are likely reasons for a firm to enter the swap market.

Answer:

Question: Historically, interest rate movements have shown less variability and greater

stability than exchange rate movements.

Answer:

Question: Unlike the situation with exchange rate risk, there is no uncertainty on the part

of management for shareholder preferences regarding interest rate risk. Shareholders prefer

that managers hedge interest rate risk rather than having shareholders diversify away such

risk through portfolio diversification.

Answer:

Question: Interest rate futures are relatively unpopular among financial managers because

of their relative illiquidity and their difficulty of use.

Answer:

Question: A basis point is one-tenth of one percent.

Answer:

Question: A swap agreement may involve currencies or interest rates, but never both.

Answer:

Question: Some of the worlds largest and most financially sound firms may borrow at

variable rates less than LIBOR.

Answer:

Question: Counterparty risk is greater for exchange-traded derivatives than for

over-the-counter derivatives.

Answer:

Question: Swap rates are derived from the yield curves in each major currency.

Answer:

Question: Your firm is faced with paying a variable rate debt obligation with the

expectation that interest rates are likely to go up. Identify two strategies using interest rate

futures and interest rate swaps that could reduce the risk to the firm.

Answer:

Question: How does counterparty risk influence a firms decision to trade exchange-traded

derivatives rather than over-the-counter derivatives?

Answer: