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. c. Purchase Canadian dollar put options.
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: convert the dollars to rupees in the spot market today and convert rupees to dollars in one year at today’s forward rate.
In the United States, the typical currency futures contract is based on a currency value in terms of: U.S. dollars.
Currency futures contracts sold on an exchange contain: a commitment to the owner, and are standardized.
Currency options sold through an options exchange contain: a right but not a commitment to the owner, and are standardized.
Forward contracts contain: a commitment to the owner, and can be tailored to the owner’s desire.
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)? Sell a futures contract on francs.
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)? Sell a futures contract on francs.
If your firm expects the euro to substantially depreciate, it could speculate by ____ euro call options or ____ euros forward in the forward exchange market. selling; selling
When you own ____, there is no obligation on your part; however, when you own ____, there is an obligation on your part. call options; forward contracts
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. greater; greater
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. A. The futures market is used for both hedging and speculating while the forward market is primarily used for hedging.
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. D. None of these are correct.
If you expect the euro to depreciate, it would be appropriate to ____ for speculative purposes. sell a euro call and buy a euro put
If you expect the British pound to appreciate, you could speculate by ____ pound call options or ____ pound put options. purchasing; selling
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 things being equal. d. The lower the exercise price relative to the spot rate, the greater the value of a currency call option, other things being equal.
Research has found that the options market is: efficient after controlling for transaction costs.
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: be about the same as the 180-day forward rate.
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. put upward pressure on; put downward pressure on
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: buying an identical futures contract.
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. increase substantially
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: buying franc call options.
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. E. None of these are correct.
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. sell futures contracts on yen
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: out of the money.
Which of the following is NOT an instrument used by U.S.-based MNCs to cover their foreign currency positions?A. forward contractsB. futures contractsC. non-deliverable forward contractsD. optionsE. All of these are instruments used to cover foreign currency positions. E. All of these are instruments used to cover foreign currency positions.
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. Sell; Buy
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. buy; sell
Which of the following would result in a profit on a euro futures contract when the euro depreciates? Sell a euro futures contract; buy a futures contract after the euro has depreciated.
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 these are true. A. Options are traded on exchanges, never over-the-counter.
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. buying; selling; buying
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. exercise and spot; exercise
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. spot and exercise; spot
Which of the following are most commonly traded on an exchange?a. forward contractsb. futures contractsc. currenciesd. None of these are correct. b. futures contracts
Conditional currency options are: options where the premiums are canceled if a trigger level is reached.
Which of the following is true regarding the currency options market? When transaction costs are controlled for, the currency options market is efficient.
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. a. the volatility of the underlying asset increases.
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. c. The buyer decides if the option will be exercised.
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. B. Corporations that expect to buy foreign currency to finance foreign subsidiaries.
If you have bought the right to sell, you are a:a. call writer.b. put buyer.c. futures buyer.d. put writer. b. put buyer.
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. b. put writer.
Which of the following is true for futures, but not for forwards?a. actual deliveryb. no transactions costsc. self-regulating marketd. None of these are correct. d. None of these are correct.
Non-deliverable forward contracts (NDFs) are frequently used for currencies in emerging markets. (T/F) True
The price of a futures contract will generally vary significantly from that of a forward contract. (T/F) False
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. (T/F) False
Forward contracts are usually liquidated by actual delivery of the currency, while futures contracts are usually liquidated by offsetting transactions. (T/F) True
If an investor who previously sold futures contracts wishes to liquidate his position, he could sell futures contracts with the same maturity date. False
The writer of a call option is obligated to sell the underlying currency to the buyer of the option if the option is exercised. True
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. True
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. True
Due to put-call parity, we can use the same formula to price calls and puts. False
If an actual put option premium is less than what is suggested by the put-call parity relationship, arbitrage can be conducted. True
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. True
Futures contracts are standardized with respect to delivery date and the futures price specified for the settlement date. False
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. True
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. True
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. True
The highest amount a buyer of a call or a put option can lose is the exercise price. True
A currency put option is a contract specifying a standard volume of a particular currency to be exchanged on a specific settlement date. False
An option writer is the seller of a call or a put option. True
The forward premium is the price specified in a call or put option. False
Hedgers should buy puts if they are hedging an expected inflow of foreign currency. True
Forward contracts are the best technique for managing exposure arising from project bidding. False
The currency futures markets are regulated by the International Monetary Fund. False
It is possible to have an opportunity loss when using futures to hedge. True
Margin is used in the forward market to mitigate default risk. False
There are no transactions costs associated with trading futures or options. False
Futures and options are available for cross rates. True
Options can be traded on an exchange or over the counter. True
The writer of a currency call option is obligated to buy the currency if the option is exercised. False
American-style options can be exercised any time up to maturity. True
If a currency put option is out of the money, then the present exchange rate is less than the strike price. False
Managers of MNCs are typically expected to use currency derivatives for speculation in order to improve profits. False
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: Out of the Money
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. a. a call writer.
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. b. a call buyer.
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 optiond. writing a call option and buying a call option simultaneously. d. writing a call option and buying a call option simultaneously.
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: In the Money
The ____ the existing spot price relative to the strike price, the ____ valuable the put options will be. Lower; More
Which of the following does NOT represent the risk from using forward contracts? 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.
The writer of a put option has a right, but not an obligation, to buy the underlying currency from the option buyer. False
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. False
Hedgers should buy calls if they are hedging an expected outflow of foreign currency. True
If a currency’s forward rate exhibits a discount, the currency is forced to appreciate. False
If a currency’s forward rate exhibits a premium, that currency is forced to depreciate. False
If a currency call option is in the money, then the present exchange rate exceeds the strike price. True
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. False
If an MNC desires to offset a forward contract that it previously created, it can simply ignore its obligation. False
Non-deliverable forward contracts (NDFs) can be used to hedge existing positions in foreign currencies that are not convertible into dollars. True
Forward contracts are usually negotiated with a commercial bank, while futures contracts are traded on an organized exchange. True
Since corporations have specialized needs, they usually prefer futures contracts to forward contracts for hedging purposes. False
A speculator in futures contracts who expects the value of a foreign currency to depreciate would likely sell futures contracts. True
The option exchanges in the United States are regulated by the Consumer Finance Protection Bureau and the Federal Trade Commission. False
A currency call option grants the right to sell a specific currency at a designated price within a specific time period. False
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. True
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. False
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. False
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. True
An advantage of a short straddle is that it provides the option writer with income from two separate sources. True
The choice of a basic versus a conditional option depends on expectations about the currency’s exchange rate over the period of concern. True
The disadvantage of a long strangle relative to a long straddle is that the underlying currency has to fluctuate more prior to expiration. True
With a bull spread, the spreader believes that the underlying currency will appreciate substantially, even more so than with a strangle. False
A forward rate for a currency is said to exhibit a discount if: the forward rate is less than the existing spot rate.
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. Upward; downward
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. c. There is an active over-the-counter market for currency futures contracts.
Which of the following would result in a profit on 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. B. Sell a futures contract; buy a futures contract after the currency has depreciated.
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. Buy; Buy
When the existing spot rate exceeds the exercise price, a call option is ____, and a put option is ____. in the money; out of the money
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. b. Speculators sell at-the-money put options when they expect that the currency’s value will rise.
When a currency call option is classified as “in the money,” this indicates that the spot rate of the currency is greater than the exercise price of the option.
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. d. The writer of a put option has the obligation to sell the currency to the buyer if the option is exercised.

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