International Finance Exam 2 – Chapter 8 – Flashcards
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1) 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
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D) A and B above
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2) 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
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A) futures
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3) Currency futures contracts have become standard fare and trade readily in the world money centers. T or F
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TRUE
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4) 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. T or F
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TRUE
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5) 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.
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D) All of the above are specified.
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6) 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%
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B) 5%
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7) Futures contracts require that the purchaser deposit an initial sum as collateral. This deposit It is called a A) collateralized deposit. B) marked market sum. C) margin. D) settlement. Answer:
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C) margin.
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8) 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:
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C) buy; buy
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9) A speculator that has ________ a futures contract has taken a ________ position. A) sold; long B) purchased; short C) sold; short D) purchased; sold Answer:
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C) sold; short
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10) Peter Simpson thinks that the UK 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:
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A) Sell ??a pound currency futures contract.
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11) 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
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B) $ 937.50 gain
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12) 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.
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D) All of the above are true.
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13) 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.
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D) All of the above are true.
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14) 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
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C) option
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15) 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
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A) call, buy, put, sell
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16) The writer of the option is referred to as the seller, and the buyer of the option is referred to as the holder. T or F
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TRUE
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17) The price at which an option can be exercised is called the ________. A) premium B) spot rate C) strike price D) commission Answer:
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C) strike price
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18) An ________ option can be exercised only on its expiration date, whereas 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
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D) European; American
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19) A call option whose exercise price exceeds the spot rate is said to be ________. A) in-the-money B) at-the-money C) out-of-the-money D) over-the-spot
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C) out-of-the-money
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20) A call option whose exercise price is less than the spot rate is said to be ________. A) in-the-money B) at-the-money C) out-of-the-money D) under-the-spot
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A) in-the-money
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21) Any 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
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B) at-the-money
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22 Foreign currency options are available both over-the-counter and on organized exchanges. T or F
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TRUE
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23) 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.
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D) all of the above.
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24) 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
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B) over-the-counter; exchange markets
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25) All exchange-traded options are settled through a clearing house but over-the-counter options are not and are thus subject to greater ________ risk. A) exchange rate B) country C) counterparty D) none of the above
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C) counterparty
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26) When reading the futures quotation in the financial section of the newspaper, the column heading indicating the number of contracts outstanding is called ________. A) contracts outstanding B) settle C) open interest D) short positions Answer:
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C) open interest
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27) The amount that an investor pays to obtain an option may be described as the ________. A) premium B) price C) cost D) all of the above
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D) all of the above
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31) Andrea Cujoli 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 / $. Andrea thinks the yen will move to ¥ 128.00 / $ in the next six months. Andrea should ________ at ________ to profit from changing currency values. A) buy yen; at the forward rate B) buy dollars; at the forward rate C) sell yen; at the forward rate D) There is not enough information to answer this question.
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A) buy yen; at the forward rate
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32) Andrea Cujoli 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 / $. Andrea thinks the yen will move to ¥ 128.00 / $ in the next six months. If Andrea buys $ 100,000 worth of yen at today's spot price and sells within the next six months at ¥ 128 / $ she will earn a profit of ________. A) $ 146.09 B) $ 101,460.94 C) $ 1460.94 D) nothing; it will lose money
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C) $ 1460.94
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33) Andrea Cujoli 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 / $. Andrea thinks the yen will move to ¥ 128.00 / $ in the next six months. If Andrea buys $ 100,000 worth of yen at today's 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
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D) unlimited, $ 100,000
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34) Andrea Cujoli 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 / $. Andrea thinks the yen will move to ¥ 128.00 / $ in the next six months. If Andrea's expectations are correct, then she 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) She could not profit in the forward market.
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B) buying yen for ¥ 128.53 / $, selling yen at ¥ 128.00 / $
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35) Andrea Cujoli 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 / $. Andrea would earn a higher rate of return by buying yen and a forward contract than if she had invested her money in 6-month US Treasury securities at an annual rate of 2.50%. T or F
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FALSE
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36) 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
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A) unlimited; the premium paid
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37) Most option profits and losses are realized through taking actual delivery of the currency rather than offsetting contracts. T or F
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FALSE
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38) 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.
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D) all of the above.
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39) 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.
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B) The maximum gain is unlimited.
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40) 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.
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D) All of the above are true.
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41) 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 and limited to the difference between the strike price the premium paid. D) all of the above.
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D) all of the above.
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42) The value of a European style call option is the sum of two components, the A) present value plus the intrinsic value. B) time value plus the present value. C) intrinsic value plus the time value. D) the intrinsic value plus the standard deviation.
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C) intrinsic value plus the time value.
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43) 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.
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D) All of the above are factors in determining the premium price.
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44) 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:
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B) intrinsic value; minimum
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45) Assume that a call option has an exercise price of $ 1.50 / ³. At a spot price of $ 1.45 / ³, 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
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C) an intrinsic value of $ 0.00
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46) The time value is asymmetric in value as you move away from the strike price. (Ie, 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.) T or F
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Answer: FALSE
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47) Other things equal, the price of an option goes up as the volatility of the option decreases. T or F
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FALSE
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48) Volatility can not be directly observed for calculation purposes of the option pricing model. Therefore, it may be determined from A) historic volatility. B) forward-looking volatility. C) implied volatility. D) any of the above.
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D) any of the above.
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49) Volatilities are the only judgmental aspect of currency option pricing and are therefore, the least important component therein. T or F
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FALSE
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50) ________ Volatility are calculated by being backed out of the market option premium values traded. A) Historic B) Forward-looking C) Implied D) None of the above
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C) Implied
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51) 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.
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C) Buy a put on the pound.
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52) 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 / $
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D) ¥ 115 / $
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53) 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
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D) $ 1.35 / euro
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54) 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.
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B) $ 2.07 / £
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55) Your US 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.
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C) buy a pound call option.
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Why are foreign currency futures contracts more popular with individuals and banks while foreign currency forwards are more popular with businesses?
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Foreign currency futures are standardized contracts that lend themselves well to speculation purposes but less so for hedging purposes. The standardized nature of the futures contract makes it easy to trade futures and to make bets about general changes in the value of currencies. Forward contracts are better for hedging in that they are tailored to meet the specific needs of the client, typically a business, and can be quite useful in reducing exchange rate risk. Banks are involved in the foreign currency futures market in part to offset positions that they may have taken in the forward markets as dealers.
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Compare and contrast foreign currency options and futures. Identify situations when you may prefer one vs. the other when speculating on foreign exchange.
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Foreign currency futures are derivative securities that allow the holder to lock in a price today for another currency at some point in the future. The foreign currency future contract is an obligation on the part of the parties to fulfill the terms of the contract. Even if prices change in an unanticipated way, the parties are obligated to fulfill the terms of the contract. The foreign currency option contract on the other hand is a right not an obligation to purchase / sell a currency at some point in the future at a price agreed upon today. If prices change in an unexpected manner, the buyer of the contract is under no obligation to exercise the contract. Option contracts are better suited to situations where price changes are anticipated, but the direction of the change is highly uncertain
