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quiz int 2
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Questions in this quiz (38)
1Thornton, 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:
- Aconvert the rupees to dollars in the spot market today and convert rupees to dollars in one year at today's forward rate.
- Bconvert the dollars to rupees in the spot market today and convert dollars to rupees in one year at the prevailing spot rate.
- Cconvert the dollars to rupees in the spot market today and convert rupees to dollars in one year at today's forward rate.
- Dconvert the dollars to rupees in the spot market today and convert rupees to dollars in one year at the prevailing spot rate.
2Which of the following is true?
- AThe futures market is used for both hedging and speculating while the forward market is primarily used for hedging.
- BThe futures market is used for both hedging and speculating while the forward market is primarily used for speculating.
- CBoth the futures market and the forward market are primarily used for speculating.
- DThe futures market is primarily used for hedgingwhile the forward market is used for speculating.
3In the United States, the typical currency futures contract is based on a currency value in terms of:
- Aeuros.
- BU.S. dollars.
- CBritish pounds.
- DCanadian dollars.
4Currency 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.
- Abuy; buy
- Bsell; sell
- Cbuy; sell
- Dsell; buy
5Which of the following is true for futures, but not for forwards?
- Aactual delivery
- Bno transactions costs
- Cself-regulating market
- DNone of these are correct.
6If you have bought a right to buy foreign currency, you are:
- Aa call writer.
- Ba call buyer.
- Ca put writer.
- Da put buyer.
7Currency options sold through an options exchange contain:
- Aa commitment to the owner, and are standardized.
- Ba commitment to the owner, and can be tailored to the owner's desire.
- Ca right but not a commitment to the owner, and can be tailored to the owner's desire.
- Da right but not a commitment to the owner, and are standardized.
8Which of the following is not true regarding currency options?
- AOptions are traded on exchanges, never over-the-counter.
- BSimilar to futures contracts, margin requirements are normally imposed on option traders.
- CAlthough commissions for options are fixed per transaction, multiple contracts may be involved in a transaction, thus lowering the commission per contract.
- DCurrency options can be classified as either put or call options.
- EAll of these are true.
9The 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.
- Agreater; lower
- Bgreater; greater
- Clower; greater
- Dlower; lower
10The purchase of a currency put option would be appropriate for which of the following?
- Ainvestors who expect to buy a foreign bond in one month
- Bcorporations that expect to buy foreign currency to finance foreign subsidiaries
- Ccorporations that expect to collect on a foreign account receivable in one month
- DAll of these are correct.
11On 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.
- Asell yen; gain of $60,000
- Bsell yen; loss of $60,000
- Cbuy yen; gain of $30,000
- Dto buy yen; loss of $30,000
12The premium of a currency put option should decrease if:
- Athe volatility of the underlying asset increases.
- Bthe spot rate increases.
- Cthe volatility of the underlying asset increases and the spot rate increases.
- DNone of these are correct.
13Assume 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 ____.
- Astraddle; purchasing a put option and purchasing a call option
- Bstrangle; purchasing a put option and selling a call option
- Cstrangle; selling a put option and selling a call option
- Dstraddle; selling a put option and purchasing a call option
14Which of the following is true of options?
- AThe writer decides whether the option will be exercised.
- BThe writer pays the buyer the option premium.
- CThe buyer decides if the option will be exercised.
- DMore than one of these.
15A 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:
- Ain the money.
- Bout of the money.
- Cat the money.
- Dat a discount
16Carl 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
17The 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:
- Awriting a put option.
- Bbuying a put option.
- Cbuying a call option
- Dwriting a call option AND buying a call option simultaneously.
18The premium of a currency put option should increase if:
- Athe volatility of the underlying asset increases.
- Bthe spot rate increases.
- Cthe volatility of the underlying asset increases AND the spot rate increases.
- DNone of these are correct.
19Johnson, 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 ____ $____.
- Apay; 20,000
- Bbe paid; 20,000
- Cpay; 2,000
- Dbe paid; 2,000
- ENone of these are correct.
20Kalons, 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?
- APurchase Canadian dollars forward.
- BPurchase Canadian dollar futures contracts.
- CPurchase Canadian dollar put options.
- DPurchase Canadian dollar call options.
21Assume 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.
- Adiscount; 11.11 percent
- Bpremium; 11.11 percent
- Cpremium; 10.81 percent
- Ddiscount; 10.81 percent
22A 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:
- Ain the money
- Bout of the money.
- Cat the money.
- Dat a discount.
23If your firm expects the euro to substantially depreciate, it could speculate by ____ euro call options or ____ euros forward in the forward exchange market.
- Aselling; selling
- Bselling; purchasing
- Cpurchasing; purchasing
- Dpurchasing; selling
24When currency options are not standardized and are traded over-the-counter, there is ____ liquidity and a ____ bid/ask spread.
- Aless; narrower
- Bmore; narrower
- Cmore; wider
- Dless; wider
25A 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
26A 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:
- Aselling futures in francs.
- Bbuying futures in francs.
- Cbuying franc put options.
- Dbuying franc call options.
27Currency futures contracts sold on an exchange contain
- Aa commitment to the owner, and are standardized.
- Ba commitment to the owner, and can be tailored to the owner's desire.
- Ca right but not a commitment to the owner, and can be tailored to the owner's desire.
- Da right but not a commitment to the owner, and are standardized.
28Which of the following does not represent the risk from using forward contracts?
- AA forward contract is used to hedge receivables, and the spot exchange rate at the expiration of the contract exceeds the contract price.
- BA 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.
- CA 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.
- DA forward contract is used to hedge payables or receivables, and the amount to be received or paid is canceled.
29A 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:
- Ain the money.
- Bout of the money.
- Cat the money.
- Dat a discount.
30Graylon, 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.
- A224,000
- B220,000
- C200,000
- D230,000
31A 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.
- Aspot and exercise; exercise
- Bspot and exercise; spot
- Cexercise and spot; exercise
- Dexercise and spot; spot
32J&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?
- APurchase euro put options.
- BSell euros forward.
- CSell euro futures contracts.
- DSell euro put options.
33Which of the following is correct?
- AThe longer the time to maturity, the lower the value of a currency call option, other things being equal.
- BThe longer the time to maturity, the lower the value of a currency put option, other things being equal.
- CThe higher the spot rate relative to the exercise price, the greater the value of a currency put option, other things being equal.
- DThe lower the exercise price relative to the spot rate, the greater the value of a currency call option, other things being equal.
34The 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
35When 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.
- Abuy; buyxxx
- Bsell; buy
- Cbuy; sell
- Dbuy; buy
36You 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.
- ENone of these are correct.
37Which of the following is not true regarding currency options?
- AThe buyer of a call option has the right to buy the currency at the strike price.
- BThe writer of a call option has the obligation to sell the currency to the buyer if the option if exercised.
- CThe buyer of a put option has the right to sell the currency at the strike price.
- DThe writer of a put option has the obligation to sell the currency to the buyer if the option is exercised.
38A 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
- ENone of these are correct.
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- Quiz on quiz int 2, created by Vladislav Tokhtaev on 22/09/2022.
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- Vladislav Tokhtaev
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