International Finance Exam 2 (Ch. 5)

A call option on British pounds has a strike (exercise) price of $1.45. The present exchange rate is $1.50. 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.

A

A put option on British pounds has a strike (exercise) price of $1.45. The present exchange rate is $1.50. 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

B

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 equal.
a. greater; greater
b. greater; lower
c. lower; lower
d. lower; greater

C

If you expect the euro to depreciate, it would be appropriate to ____ for speculative purposes.

a. buy a euro call or buy a euro put

b. buy a euro call or sell a euro put

c. sell a euro call or sell a euro put

d. sell a euro call or buy a euro put

D

The premium on a pound put option is $.02 per unit. The exercise price is $1.50. The break-even point is ____ for the buyer of the put, and ____ for the seller of the put.

a. $1.52; $1.52

b. $1.48; $1.48

c. $1.52; $1.48

d. $1.48; $1.52

e. $1.48; $1.50

B

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.

D

The forward rate of a foreign currency forward contract is typically ____ the current spot rate of the currency.

a. higher than

b. the same as

c. lower than

d. different from

D

The price of British pound futures with a settlement date 90 days from now will:

a. be significantly above the 90-day pound forward rate.

b. be about the same as the 90-day pound forward rate.

c. be significantly below the 90-day pound forward rate.

d. none of the above; there is no relation between the futures and forward prices.

B

US firm will receive one million Canadian dollar from its export in 6 month. To avoid exchange rate risk, the firm can hedge the Canadian dollar receivable by _____.

a. buying Canadian dollar put options

b. selling Canadian dollar call options

c. buying Canadian dollar call options

d. selling Canadian dollar put options

A

If a company wants to hedge payables using forward contracts, what should they do?
a. sell a forward contract
b. buy a forward contract
c. sell a futures contract
d. buy an options contract

B

What is the forward rate in a forward contract?
a. The exchange rate currently observed in the spot market
b. The interest rate applied to the foreign currency
c. The specified exchange rate
d. The predicted exchange rate at the contract’s maturity

C

Forward premium is the
a. difference between two countries’ interest rates
b. amount a currency appreciates in the spot market
c. discount applied to a currency in the futures market
d. rate at which the forward rate exceeds the spot rate

D

A forward premium or discount of -0.95% indicates
a. A discount of 0.95%
b. A premium of 0.95%

A; negative = discount. positive = premium

A ____ is an obligation to purchase or sell currency on a specific settlement date in the future, but with standard contract specifications
a. Forward contract
b. Futures contract
c. Currency option
d. Spot contract

B

If a company wants to hedge payables using futures contracts, what should they do?
a. sell a futures contract
b. buy a futures contract
c. hold the currency until payment is due
d. purchase a forward contract to sell the currency

B

If a company wants to hedge receivables using futures contracts, what should they do?
a. buy a futures contract
b. hold the currency until maturity
c. sell a futures contract
d. purchase a forward contract

C

The sale of futures contracts locks in the price at which a firm can ___ a currency.
a. gain
b. lose
c. buy
d. sell

D

If a company wants to hedge receivables using forward contracts, what should they do?
a. sell a forward contract
b. buy a forward contract
c. purchase currency futures contracts
d. borrow foreign currency and repay later

A

The purchase of futures contracts locks in the price at which a firm can ___ a currency.
a. sell
b. purchase
c. hedge
d. None of the above

B

Speculating with currency futures:

You buy 500,000 pesos at a spot rate of $0.08 per peso
You plan to sell a futures contract of 500,000 pesos at $0.09 per peso.
What would your gain or loss in USD be if you did this?

1. 500,000 × 0.08 = $40,000 worth of pesos bought

2. 500,000 × 0.09 = $45,000 received from contract
   
   Bought 500,000 pesos for $40,000.
   Sold 500,000 pesos for $45,000
   Gain of $5,000

Currency futures are often sold by speculators when they expect that:

a. The future spot rate of the currency will rise above the futures price
b. The future spot rate of the currency will fall below the futures price
c. The futures market price will always equal the spot rate
d. The currency will remain stable relative to other currencies

B

If a currency option is expected to appreciate
a. buy call or sell put
b. buy put or buy call
c. buy put or sell call
d. sell put or sell call

A

If a currency option is expected to depreciate
a. buy call or buy put
b. sell put or buy call
c. buy put or sell call
d. sell put or sell call

B

_____ provide the right to purchase or sell currencies at specified price
a. Forward contract
b. Futures contract
c. Currency options
d. All of the above

C

_____ grant the right to buy a specific currency at a designated strike price or exercise price within a specific period of time.
a. Futures contracts
b. Put options
c. Forward contracts
d. Call options

D

Who pays the premium in a currency call option?
a. The buyer
b. The seller
c. Nobody
d. Both the buyer and the seller

A

If the exchange rate of a call option is greater than its strike price, the option is
a. in the money
b. at the money
c. out of the money

A

Firms use call options to hedge _____.
a. exchange rates
b. interest rates
c. payables
d. receivables

C

Firms use put options to hedge _____.
a. exchange rates
b. interest rates
c. payables
d. receivables

D

Factors that influence call option premiums: Determine from the following scenarios if premium will be higher or lower

1. A higher spot price relative to strike price

2. A longer length of time before expiration

3. A higher volatility of the currency

1. Higher premium

2. Higher premium

3. Higher premium

What 3 factors influence put option premiums? List them and whether they have a positive or negative relationship

1. Spot rate relative to strike price (-)

2. Time until expiration (+)

3. Variability of currency (+)

Grants the right to sell a currency at a specified strike price or exercise price within a specified period of time.
a. put option
b. call option
c. forward contract
d. futures contract

A

If the spot rate of a currency put falls below strike price, the owner can exercise their right to ____ the currency at the strike price.
(buy/sell)

sell

If the spot rate of a currency call option rises above strike price, the owner can exercise their right to ___ the option at the strike price.
(buy/sell)

buy

Which of the following factors affects both call and put option premiums?

a. Volatility of the currency exchange rate
b. Size of the futures contract
c. Number of brokerage firms trading the currency
d. Level of international trade in the currency

A

Speculators who expect a foreign currency to appreciate will most likely:

a. Purchase currency call options
b. Sell currency call options
c. Purchase currency put options
d. Sell currency futures contracts

A

Speculators who expect a foreign currency to depreciate will most likely:

a. Purchase currency call options
b. Purchase currency put options
c. Buy currency futures contracts
d. Purchase currency forwards

B

The net profit of a speculator who buys a currency call option depends primarily on:

a. The difference between the selling price of the currency and the exercise price minus the premium
b. The difference between the strike price and the spot price plus the premium
c. The amount of margin required by the exchange
d. The number of standardized contracts traded

A

The net profit for a buyer of a currency put option depends on:

a. The strike price relative to the spot price and the premium paid
b. The premium relative to the margin requirement
c. The spot rate relative to the futures price
d. The difference between forward and spot rates

A

The break-even point for a buyer of a call option occurs when:

a. The revenue from selling the currency equals the cost plus the option premium
b. The premium from buying the currency equals the spot exchange rate of the currency
c. The spot rate equals zero
d. The strike price equals the premium

A

The break-even exchange rate for a buyer of a put option can be expressed as:

a. Strike price + premium
b. Strike price − premium
c. Spot rate + premium
d. Spot rate − premium

B

The dollar amount paid when exercising a call option hedge includes:

a. Strike price x currency amount - premium
b. Strike price x currency amount + premium
c. Only the spot exchange rate
d. Strike price - Premium

B

The dollar amount paid when exercising a put option hedge includes:

a. Strike price x currency amount - premium
b. Strike price x currency amount + premium
c. Only the spot exchange rate
d. Strike price - Premium

A

Premium is best defined as:

a. The price paid for a currency option
b. The strike price specified in the option contract
c. The future exchange rate expected by the market
d. The margin required to trade currency futures

A