Chapter 1: Multinational financial management: An overview 5.

5. The valuation of an MNC should rise when an event causes the expected cash flows
1. The commonly accepted goal of the MNC is to: from foreign to ____ and when foreign currencies denominating these cash flows are
a. maximize short-term earnings. expected to ____.
b. maximize shareholder wealth. a. decrease; appreciate
c. minimize risk. b. increase; appreciate
d. A and C. c. decrease; depreciate
e. maximize international sales. d. increase; depreciate
ANS: B ANS: B
2. With regard to corporate goals, an MNC is mostly concerned with maximizing 6. Which of the following theories identifies specialization as a reason for
____, and a purely domestic firm is mostly concerned with maximizing ____. international business?
a. shareholder wealth; short-term earnings a. theory of comparative advantage.
b. shareholder wealth; shareholder wealth b. imperfect markets theory.
c. short-term earnings; sales volume c. product cycle theory.
d. short-term earnings; shareholder wealth d. none of the above
ANS: B ANS: A
3. For the MNC, agency costs are typically: 7. Which of the following theories identifies the non-transferability of resources as a
a. non-existent. reason for international business?
b. larger than agency costs of a small purely domestic firm. a. theory of comparative advantage.
c. smaller than agency costs of a small purely domestic firm. b. imperfect markets theory.
d. the same as agency costs of a small purely domestic firm. c. product cycle theory.
ANS: B d. none of the above
4. Which of the following could reduce agency problems for an MNC? ANS: B
a. stock options as managerial compensation. 8. Which of the following theories suggests that firms seek to penetrate new markets
b. hostile takeover threat. (thâm nhập tt mới) over time?
c. investor monitoring. a. theory of comparative advantage.
d. all of the above are forms of corporate control that could reduce agency problems for b. imperfect markets theory.
an MNC. c. product cycle theory.
ANS: D d. none of the above
ANS: C
9. Which of the following industries would most likely take advantage of lower costs c. ties executive compensation to firm performance
in some less developed foreign countries? d. places a limit on the amount of funds that managers can spend
a. assembly line production (dây chuyền sản xuất lắp ráp) ANS: A
b. specialized professional services. 16. MNCs can improve their internal control process by all of the following, except:
c. nuclear missile planning. a. establishing a centralized data base of information
d. planning for more sophisticated computer technology. b. ensuring that all data are reported consistently among subsidiaries
ANS: A c. ensuring that the MNC always borrows from countries where interest rates are lowest
10. Due to the risks involved in international business, firms should: d. using a system that checks internal data for unusual discrepancies
a. only consider international business in major countries. ANS: C
b. maintain international business to no more than 20% of total business. 21. In comparing exporting to direct foreign investment (DFI), an exporting operation
c. maintain international business to no more than 35% of total business. will likely incur ____ fixed production costs and ____ transportation costs than DFI.
d. none of the above a. higher; higher
ANS: D b. higher; lower
13. The agency costs of an MNC are likely to be lower if it: c. lower; lower
a. scatters its subsidiaries across many foreign countries. d. lower; higher
b. increases its volume of international business ANS: D
c. uses a centralized management style. (sử dụng phong cách quản lý tập trung) 22. Which of the following is an example of direct foreign investment?
d. A and B. a. exporting to a country.
ANS: C b. establishing licensing arrangements in a country.
14. An MNC may be more exposed to agency problems if most of its shares are held c. purchasing existing companies in a country.
by: d. investing directly (without brokers) in foreign stocks.
a. a few mutual funds ANS: C
b. a widely dispersed set of individual investors 23. According to the text, a disadvantage of licensing is that:
c. a few pension funds a. it prevents a firm from importing.
d. all of the above would prevent agency problems b. it is difficult to ensure quality control of the production process.
ANS: B c. it prevents a firm from exporting.
15. The Sarbanes-Oxley Act improves corporate governance of MNCs because it: d. none of the above
a. makes executives more accountable for verifying financial statements ANS: B
b. eliminates stock options as a form of compensation 24. ____ are most commonly classified as a direct foreign investment.
a. Foreign acquisitions b. entails minimal risk.
b. Purchases of international stocks c. does not require large amount of investment.
c. Licensing agreements d. all of the above.
d. Exporting transactions ANS: D
ANS: A 44. Assume that an American firm wants to engage in international business without
29. Which of the following is not mentioned in the text as an additional risk resulting major investment in the foreign country. Which method is least appropriate in this
from international business? situation?
a. exchange rate fluctuations. a. International Trade
b. political risk. b. Licensing
c. interest rate risk. c. Franchising
d. exposure to foreign economies. d. Direct foreign investment
ANS: C ANS: D
30. Licensing obligates a firm to provide ____, while franchising obligates a firm to 46. The MNC's value depends on all of the following, except:
provide ____. a. MNC's required rate of return
a. a specialized sales or service strategy; its technology b. Amount of MNC's cash flows in particular currency
b. its technology; a specialized sales or service strategy c. The exchange rate at which cash flows are converted to dollars
c. its technology; its technology d. The value of MNC depends on all of the above factors
d. a specialized sales or service strategy; a specialized sales or service strategy ANS: D
e. its technology; an initial investment 47. Which of the following is not an example of political risk?
ANS: B a. Government may impose taxes on subsidiary
31. Which of the following is not a way in which agency problems can be reduced b. Government may impose barriers on subsidiary
through corporate control? c. Consumers may boycott the MNC
a. executive compensation. d. Consumers' income levels will decrease, thus decreasing consumption.
b. threat of hostile takeover. ANS: D
c. acquisition of a foreign subsidiary. 50. International trade generally results in ____ exposure to international political
d. monitoring by large shareholders. risk and ____ exposure to international economic conditions, when compared to other
ANS: C methods of international business.
43. International trade: a. higher; lower
a. is a relatively conservative approach to foreign market penetration. b. higher; higher
c. lower; higher ANS: C
d. lower; lower 56. Jensen Co. wants to establish a new subsidiary in Mexico that will sell computers
ANS: D to Mexican customers and remit earnings back to the U.S. parent. The value of this
51. Assume that Boca Co. wants to expand its business to Japan, and wants complete project will be favorably affected if the value of the peso ____ while it establishes the
control over the operations in Japan. Which method of international business is most new subsidiary and ____ when the subsidiary starts operations.
appropriate for Boca Co? a. depreciates; appreciates
a. Joint venture b. appreciates; appreciates
b. Licensing c. appreciates; depreciates
c. Partial acquisition of existing Japanese firm d. depreciates; depreciates
d. Establishment of Japanese subsidiary ANS: A
ANS: B 59. Livingston Co. has a subsidiary in Korea. The subsidiary reinvests half of its net
54. Assume that Live Co. has expected cash flows of $200,000 from domestic cash flows into operations and remits half to the parent. Livingston's expected cash
operations, SF 200,000 from Swiss operations, and 150,000 euros from Italian op- flows from domestic business are $100,000 and the Korean subsidiary is expected to
erations at the end of the year. The Swiss franc's value and euro's value are ex-pected generate 100 million Korean won at the end of the year. The expected value of won is
to be $.83 and $1.29 respectively, at the end this year. What are the expected dollar $.0012. What are the expected dollar cash flows of Livingston Co.?
cash flows of Live Co? a. $100,000
a. $200,000 b. $200,000
b. $559,500 c. $160,000
c. $582,500 d. $60,000
d. $393,500 ANS: C
ANS: B 73. The goal of a multinational corporation (MNC) is:
55. Saller Co. has a subsidiary in Mexico. The expected cash flows in pesos to be a. The minimization of taxes remitted from foreign subsidiaries
received in the future from this subsidiary have not changed since last month, but the b. The establishment of subsidiaries in any country where operations would provide a
valuation of Saller Co. has declined since last month. What could've caused this return over and above the cost of capital, even if bet-ter projects are available domestically
decline in value? c. The maximization of shareholder wealth
a. A weaker Mexican economy d. The maximization of social benefits resulting from actions such as the employment of
b. Lower Mexican interest rates foreign managers.
c. Depreciation of the Mexican peso ANS: C
d. Appreciation of the Mexican peso.
74. Agency costs faced by multinational corporations (MNCs) may be larger than c. The establishment of new subsidiaries.
those faced by purely domestic firms because d. All of the above
a. Monitoring of managers located in foreign countries is more difficult. e. B and C only
b. Foreign subsidiary managers raised in different cultures may not follow uniform goals. ANS: E
c. MNCs are relatively large. 78. The least risky method by which firms conduct international business is:
d. All of the above a. Franchising
e. A and B only b. The acquisitions of existing operations
ANS: D c. International Trade
75. Which of the following is not one of the more common methods used by MNCs to d. The establishment of new subsidiaries
improve their internal control process? e. Licensing
a. Establishing a centralized database of information ANS: C
b. Ensuring that all data are reported consistently among subsidiaries 79. Which of the following does not constitute a form of direct foreign investment?
c. Speeding the process by which all departments and all subsidiaries have access to the a. Franchising
data that they need b. International trade
d. Making executives more accountable for financial statements by per-sonally verifying c. Joint ventures
their accuracy d. Acquisitions of existing operations
e. All of the above are common methods used by MNCs to improve their internal control e. Establishment of new foreign subsidiaries
process. ANS: B
ANS: E
76. Which of the following is not mentioned in the text as a theory of international Chapter 2
business?
a. Theory of Comparative Advantage
b. Imperfect Markets Theory International Flow of Funds
c. Product Cycle Theory
d. Globalization of Business Theory
e. All of the above are mentioned in the text as theories of international business ANS: D 1. Recently, the U.S. experienced an annual balance of trade representing a __________.
77. The most risky method(s) by which firms conduct international business is (are): A) large surplus (exceeding $100 billion)
a. Franchising. B) small surplus
b. The acquisitions of existing operations. C) level of zero
 D) deficit D) Canada

ANSWER: D ANSWER: D

2. A high home inflation rate relative to other countries would _______ the home 5. An increase in the current account deficit will place _______ pressure on the home
country’s current account balance, other things equal.  A high growth in the home currency value, other things equal.
income level relative to other countries would _______ the home country’s current A) upward
account balance, other things equal. B) downward
A) increase; increase C) no
B) increase; decrease D) upward or downward (depending on the size of the deficit)
C) decrease; decrease
D) decrease; increase ANSWER: B

ANSWER: C 6. If the home currency begins to appreciate against other currencies, this should
____________ the current account balance, other things equal (assume that substitutes
3. If a country’s government imposes a tariff on imported goods, that country’s current are readily available in the countries, and that the prices charged by firms remain the
account balance will likely __________ (assuming no retaliation by other same).
governments). A) increase
A) decrease B) have no impact on
B) increase C) reduce
C) remain unaffected D) all of the above are equally possible
D) either A or C are possible
ANSWER: C
ANSWER: B
7. The International Financial Corporation was established to:
4. _________ purchases more U.S. exports than the other countries listed here. A) enhance development solely in Asia through grants.
A) Italy B) enhance economic development through non-subsidized loans (at market interest
B) Spain rates).
C) Mexico
 C) enhance economic development through low-interest rate loans (below-market 10. Which of the following would likely have the least direct influence on a country’s
rates). current account?
D) enhance economic development of the private sector through investment in stock A) inflation.
of corporations. B) national income.
C) exchange rates.
ANSWER: D D) tariffs.
E) a tax on income earned from foreign stocks.
8. The World Bank was established to:
A) enhance development solely in Asia through grants. ANSWER: E
B) enhance economic development through non-subsidized loans (at market interest
rates). 11. The “J curve” effect describes:
C) enhance economic development through low-interest rate loans (below-market A) the continuous long-term inverse relationship between a country’s current account
rates). balance and the country’s growth in gross national product.
D) enhance economic development of the private sector through investment in stock B) the short-run tendency for a country’s balance of trade to deteriorate even while
of corporations. its currency is depreciating.
C) the tendency for exporters to initially reduce the price of goods when their own
ANSWER: B currency appreciates.
D) the reaction of a country’s currency to initially depreciate after the country’s
9. The International Development Association was established to: inflation rate declines.
A) enhance development solely in Asia through grants.
B) enhance economic development through non-subsidized loans (at market interest ANSWER: B
rates).
C) enhance economic development through low-interest rate loans (below-market 12. An increase in the use of quotas is expected to:
rates). A) reduce the country’s current account balance, if other governments do not
D) enhance economic development of the private sector through investment in stock retaliate.
of corporations. B) increase the country’s current account balance, if other governments do not
retaliate.
ANSWER: C C) have no impact on the country’s current account balance unless other governments
retaliate.
 D) increase the volume of a country’s trade with other countries.
16. The direct foreign investment positions by U.S. firms have generally ________ over
ANSWER: B time; the direct foreign investment positions in the U.S. by non-U.S. firms have
generally ______ over time.
13. The U.S. typically has a balance-of-trade surplus in its trade with __________ . A) increased; increased
A) China B) increased; decreased
B) Japan C) decreased; decreased
C) A and B D) decreased; increased
D) none of the above
ANSWER: A
ANSWER: D 17. Which of the following is the biggest target of direct foreign investment by U.S. firms?
A) Mexico.
14. The North American Free Trade Agreement (NAFTA) increased restrictions on: B) Japan.
A) trade between Canada and Mexico. C) United Kingdom.
B) trade between Canada and the U.S. D) Germany.
C) direct foreign investment in Mexico by U.S. firms.
D) none of the above. ANSWER: C

ANSWER: D 18. The primary component of the current account is the:

A) balance of trade.
15. According to the text, international trade (exports plus imports combined) as a B) balance of money market flows.
percentage of GDP is: C) balance of capital market flows.
A) higher in the U.S. than in European countries. D) unilateral transfers.
B) lower in the U.S. than in European countries.
C) higher in the U.S. than in about half the European countries, and lower in the U.S. ANSWER: A
than the others.
D) about the same in the U.S. as in European countries. 19. As a result of the European Union, restrictions on exports between _______ were
reduced or eliminated.
ANSWER: B A) member countries and the U.S.
 B) member countries ANSWER: B
C) member countries and European non-members
D) none of the above 23. Which of the following is mentioned in the text as a possible means by which the
government
ANSWER: B may attempt to improve its balance of trade position (increase its exports or reduce its
imports).
20. Over the last several years, international trade (exports plus imports) as a percentage of A) It could attempt to strenthen its local currency value.
GDP has generally: B) Firms based in a country receive subsidies from their government, produce
A) increased for most major countries. products, and then export those products at a cheap price.
B) decreased for most major countries. C) Firms based in one country are allowed by their government to offer bribes to large
C) stayed about constant for most major countries. customers when pursuing business deals in a particular industry.
D) increased for about half the major countries and decreased for the others. D) all of the above are mentioned

ANSWER: A ANSWER: A

21. Which is not a concern about the North American Free Trade Agreement (NAFTA)? 24. The demand for U.S. exports tends to increase when:
A) its impact on U.S. inflation. A) economic growth in foreign countries decreases.
B) its impact on U.S. unemployment. B) the currencies of foreign countries strengthen against the dollar.
C) lower environmental standards in Mexico. C) U.S. inflation rises.
D) different health laws for workers in Mexico. D) none of the above

ANSWER: A ANSWER: B

22. A General Agreement on Tariffs and Trade (GATT) accord in 1993 called for: 25. “Dumping” is used in the text to represent the:
A) increased trade restrictions outside of North America. A) exporting of goods that do not meet quality standards.
B) lower trade restrictions around the world. B) sales of junk bonds to foreign countries.
C) uniform environmental standards around the world. C) removal of foreign subsidiaries by the host government.
D) uniform worker health laws. D) exporting of goods at prices below cost.
 ANSWER: D 29. Like the International Monetary Fund (IMF), the _______________ is composed
26. ______________ is (are) income received by investors on foreign investments in of a collection of nations as members. However, unlike the IMF, it uses the private
financial assets (securities). rather than the government sector to achieve its objectives.
A) Portfolio income A) World Bank
B) Direct foreign income B) International Financial Corporation (IFC)
C) Unilateral transfers C) World Trade Organization (WTO)
D) Factor income D) International Development Association (IDA)
E) Bank for International Settlements (BIS)
ANSWER: D
ANSWER: B
27. A weak home currency may not be a perfect solution to correct a balance of trade
deficit because: 30. The World Bank’s Multilateral Investment Guarantee Agency (MIGA):
A) it reduces the prices of imports paid by local companies. A) offers various forms of export insurance.
B) it increases the prices of exports by local companies. B) offers various forms of import insurance.
C) it prevents international trade transactions from being prearranged. C) offers various forms of exchange rate risk insurance.
D) foreign companies may reduce the prices of their products to stay competitive. D) provides loans to developing countries.
E) offers various forms of political risk insurance.
ANSWER: D
ANSWER: E
28. Intracompany trade makes up approximately _____ percent of all international
trade.
A) 50
B) 70
C) 25
D) 13
E) 5

ANSWER: A
31. Also known as the “central banks’ central bank,” the __________ attempts to 51. In recent years, the U.S. has had a relatively (compared to other countries)____
facilitate cooperation among countries with regard to international transactions and balance of trade _____ with China.
provides assistance to countries experiencing a financial crisis. A) small; surplus
A) World Bank B) large; surplus
B) International Financial Corporation (IFC) C) small; deficit
C) World Trade Organization D) large; deficit
D) International Development Association (IDA)
E) Bank for International Settlements (BIS) ANSWER) D

ANSWER: E 55. Assume the U.S. has a balance of trade surplus with the Country of Thor. When
individuals in Thor manufacture CDs and DVDs that look almost exactly like the
32. Direct foreign investment into the U.S. represents a ________. original product produced in the U.S. and other countries, they ______ the U.S.
A) capital inflow balance of trade surplus with Thor. This activity is called _____.
B) trade inflow A) reduce; flipping
C) capital outflow B) reduce; pirating
D) trade outflow C) increase; pirating
D) increase; flipping
ANSWER: A
ANSWER: B
47. A country’s net outflow of funds ___ affect its interest rates, and ____ affect its
economic conditions. 56. Japan’s annual interest rate has been relatively ____ compared to other countries for
A) does; does several years, because the supply of funds in its credit market has been very _____.
B) does: does not A) low; small
C) does not: does not B) high; small
D) does not: does C) low; large
D) high; large
ANSWER: A
ANSWER) C
57. Without the international capital flows, there would be _____ funding available in the
U.S. across 68. Which of the following factors does probably not directly affect a country’s capital
all risk levels, and the cost of funding would be _____ regardless of the firm’s risk account and its
level. components?
A) more; lower A) Inflation
B) more; higher B) Interest rates
C) less; lower C) Withholding taxes on foreign income
D) less; higher D) Exchange rate movements
E) All of the above will directly affect a country’s capital account.
ANSWER: D
66. The ___________ is the difference between exports and imports. ANSWER: A
A) Balance of trade
B) Balance on goods and services 69. The _______________, an accord among 117 nations, called for lower tariffs around
C) Balance of payments the world.
D) Current account A) General Agreement on Tariffs and Trade (GATT)
E) Capital account B) North American Free Trade Agreement (NAFTA)
C) Single European Act of 1987
ANSWER: A D) European Union Accord
E) None of the above
67. Which of the following will probably not result in an increase in a country’s current
account balance ANSWER: A
(assuming everything else constant)?
A) A decrease in the country’s rate of inflation 70. Which of the following is not a “subtle” trade restriction Country X may use against
B) A decrease in the country’s national income level Country Y?
C) An increase in government restrictions in the form of tariffs or quotas A) The government of Country X eliminates environmental restrictions.
D) An appreciation of the country’s currency B) The government of Country X subsidizes firms in its country to facilitate
E) All of the above will result in an increased current account balance. dumping.
C) The government of Country X provides tax breaks to firms in specific industries.
ANSWER: D
 D) The government of Country X imposes a tariff on goods imported from Country
Y. 72. Which of the following would increase the current account of country X? Country Y is
E) The government of Country X allows its firms to offer bribes to large customers country X’s
when pursuing business deals. sole trading partner.
A) Inflation increases in countries X and Y by comparable amounts.
ANSWER: D B) Country X’s and Country Y’s currencies depreciate by the same amount.
C) Country X imposes tariffs on imports from Country Y, and Country Y retaliates
71. Which of the following statements is not true? by imposing an identical tax on X’s exports.
A) Exporters may complain that they are being mistreated because the currency of D) The central banks of country X and country Y reduce the money supply to
their country is too weak. increase interest rates.
B) Outsourcing affects the balance of trade because it means that a service is E) Country X imposes a quota on imports, and Country Y retaliates by imposing an
purchased in another country. identical quota on X’s exports.
C) Sometimes, trade policies are used to punish countries for various actions.
D) Tariffs imposed by the EU have caused some friction between EU countries that ANSWER: D
commonly import products and other EU countries.
E) All of the above are true. 73. ____________ represent aid, grants, and gifts from one country to another.
A) Transfer payments
ANSWER: A B) Factor income
C) The balance of trade
D) The balance of payments
E) The capital account

ANSWER: A
74. Which of the following is not a goal of the International Monetary Fund (IMF)? SOLUTION: Bid-ask percentage spread = ($.47 - $.45)/$.47 = 4.26%
A) To promote cooperation among countries on international monetary issues 2. Assume that a bank's bid rate on Japanese yen is $.0041 and its ask rate is $.0043. Its
B) To promote stability in exchange rates bid-ask percentage spread is:
C) To enhance a country’s long-term economic growth via the extension of structural a. about 4.99%.
adjustment loans b. about 4.88%.
D) To promote free trade c. about 4.65%.
E) To promote free mobility of capital funds across countries d. about 4.43%.
ANS: C
ANSWER: C SOLUTION: Bid-ask percentage spread = ($.0043 - $.0041)/$.0043 = 4.65% 3. The
bid/ask spread for small retail transactions is commonly in the range of ____ percent.
75. According to the “J curve effect,” a weakening of the U.S. dollar relative to its trading a. 3 to 7
partners' b. .01 to .03
currencies would result in an initial ____________ in the current account balance, c. 10 to 15
followed by a subsequent _____________ in the current account balance. d. .5 to 1
A) Decrease; increase ANS: A
B) Increase; decrease 4. ____ is not a factor that affects the bid/ask spread.
C) Decrease; decrease a. Order costs
D) Increase; increase b. Inventory costs
c. Volume
ANSWER: A d. All of the above factors affect the bid/ask spread
ANS: D
Chapter 3: International Financial Markets 7. According to the text, the forward rate is commonly used for:
1. Assume that a bank's bid rate on Swiss francs is $.45 and its ask rate is $.47. Its bid-ask a. hedging.
percentage spread is: b. immediate transactions.
a. about 4.44%. c. previous transactions.
b. about 4.26%. d. bond transactions.
c. about 4.03%. ANS: A
d. about 4.17%. 8. If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it is receiving
ANS: B 100,000 in 90 days, it could:
a. obtain a 90-day forward purchase contract on euros. a. prohibited.
b. obtain a 90-day forward sale contract on euros. b. less liquid than markets for developed countries.
c. purchase euros 90 days from now at the spot rate. c. more liquid than markets for developed countries.
d. sell euros 90 days from now at the spot rate. d. only available for use by government agencies.
ANS: B ANS: B
9. If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it will need 13. A forward contract can be used to lock in the ____ of a specified currency for a future
C$200,000 in 90 days to make payment on imports from Canada, it could: point in time.
a. obtain a 90-day forward purchase contract on Canadian dollars. a. purchase price
b. obtain a 90-day forward sale contract on Canadian dollars. b. sale price
c. purchase Canadian dollars 90 days from now at the spot rate. c. A or B
d. sell Canadian dollars 90 days from now at the spot rate. d. none of the above
ANS: A ANS: C
10. Assume the Canadian dollar is equal to $.88 and the Peruvian Sol is equal to $.35. The 14. The forward market:
value of the Peruvian Sol in Canadian dollars is: a. for euros is very illiquid.
a. about .3621 Canadian dollars. b. for Eastern European countries is very liquid.
b. about .3977 Canadian dollars. c. does not exist for some currencies.
c. about 2.36 Canadian dollars. d. none of the above
d. about 2.51 Canadian dollars. ANS: C
ANS: B 15. ____ is not a bank characteristic important to customers in need of foreign exchange.
SOLUTION: $.35/$.88 = .3977 a. Quote competitiveness
11. Which of the following is not true with respect to spot market liquidity? b. Speed of execution
a. The more willing buyers and sellers there are, the more liquid a market is. c. Forecasting advice
b. The spot markets for heavily traded currencies such as the Japanese yen are very liquid. d. Advice about current market conditions
c. A currency's liquidity affects the ease with which an MNC can obtain or sell that e. All of the above are important bank characteristics to customers in need of foreign
currency. exchange.
d. If a currency is illiquid, an MNC is typically able to quickly purchase that currency at a ANS: E
reasonable exchange rate. 16. The Basel II accord is focused on eliminating inconsistencies in ____ across countries.
ANS: D a. capital requirements
12. Forward markets for currencies of developing countries are: b. deposit rates
c. deposit insurance ANS: A
d. bank failure policies 21. A syndicated loan:
ANS: A a. represents a loan by a single bank to a syndicate of corporations.
17. The international money market primarily concentrates on: b. represents a loan by a single bank to a syndicate of country governments.
a. short-term lending (one year or less). c. represents a direct loan by a syndicate of oil-producing exporters to a less developed
b. medium-term lending. country.
c. long-term lending. d. represents a loan by a group of banks to a borrower.
d. placing bonds with investors. e. A and B
e. placing newly issued stock in foreign markets. ANS: D
ANS: A 22. The international money market is primarily served by:
18. The international credit market primarily concentrates on: a. the governments of European countries, which directly intervene in foreign currency
a. short-term lending (less than one year). markets.
b. medium-term lending. b. government agencies such as the International Monetary Fund that enhance development
c. long-term lending. of countries.
d. providing an exchange of foreign currencies for firms who need them. c. several large banks that accept deposits and provide loans in various cur-rencies.
e. placing newly issued stock in foreign markets. d. small banks that convert foreign currency for tourists and business visitors.
ANS: B ANS: C
19. The main participants in the international money market are: 23. International money market transactions normally represent:
a. consumers. a. the equivalent of $1 million or more.
b. small firms. b. the equivalent of $1,000 to $10,000.
c. large corporations. c. the equivalent of between $10,000 and $100,000.
d. small European firms needing European currencies for international trade. d. the equivalent of between $100,000 and $200,000.
ANS: C ANS: A
20. LIBOR is: 25. From 1944 to 1971, the exchange rate between any two currencies was typically:
a. the interest rate commonly charged for loans between banks. a. fixed within narrow boundaries.
b. the average inflation rate in European countries. b. floating, but subject to central bank intervention.
c. the maximum loan rate ceiling on loans in the international money market. c. floating, and not subject to central bank intervention.
d. the maximum deposit rate ceiling on deposits in the international money market. d. nonexistent; that is currencies were not exchanged, but gold was used to pay for all
e. the maximum interest rate offered on bonds that are issued in London. foreign transactions.
ANS: A 30. Futures contracts are typically ____; forward contracts are typically ____.
26. As a result of the Smithsonian Agreement, the U.S. dollar was: a. sold on an exchange; sold on an exchange
a. the currency to be used by all countries as a medium of exchange for international trade. b. offered by commercial banks; sold on an exchange
b. forced to be freely floating relative to all currencies without any boundaries. c. sold on an exchange; offered by commercial banks
c. devalued relative to major currencies. d. offered by commercial banks; offered by commercial banks
d. revalued (upward) relative to major currencies. ANS: C
ANS: C 31. Eurobonds:
27. According to the text, the average foreign exchange trading around the world ____ per a. are usually issued in bearer form.
day. b. typically carry several protective covenants.
a. equals about $200 billion C. cannot contain call provisions.
b. equals about $400 billion d. A and B
c. equals about $700 billion ANS: A
d. exceeds $1 trillion 32. Which of the following is true?
ANS: D a. Non-U.S. firms may desire to issue bonds in the U.S. due to less regula-tions in the U.S.
28. Assume a Japanese firm invoices exports to the U.S. in U.S. dollars. Assume that the b. U.S. firms may desire to issue bonds in the U.S. due to less regulations in the U.S.
forward rate and spot rate of the Japanese yen are equal. If the Japanese firm expects the c. U.S. firms may desire to issue bonds in the non-U.S. markets due to less regulations in
U.S. dollar to ____ against the yen, it would likely wish to hedge. It could hedge by ____ non-U.S. countries.
dollars forward. d. A and B
a. depreciate; buying ANS: C
b. depreciate; selling 33. Eurobonds:
c. appreciate; selling a. can be issued only by European firms.
d. appreciate; buying b. can be sold only to European investors.
ANS: B c. A and B
29. The bid-ask spread on an exchange rate can be used to directly determine: d. none of the above
a. how an exchange rate will change. ANS: D
b. the transaction cost of foreign exchange. 34. Which currency is used the most to denominate Eurobonds?
c. the forward premium. a. the British pound.
d. the currency option premium. b. the Japanese yen.
ANS: B c. the U.S. dollar.
d. the Swiss franc. e. none of the above
ANS: C ANS: D
35. When the foreign exchange market opens in the U.S. each morning, the opening SOLU-TION: ($.008/$.59) = F$.014/¥
exchange rate quotations will be based on the: 51. A share of the ADR of a Dutch firm represents one share of that firm's stock that is
a. closing prices in the U.S. during the previous day. traded on a Dutch stock exchange. The share price of the firm was 15 euros when the
b. closing prices in Canada during the previous day. Dutch market closed. As the U.S. market opens, the euro is worth $1.10. Thus, the price of
c. prevailing prices in locations where the foreign exchange markets have been open. the ADR should be ____.
d. officially set by central banks before the U.S. market opens. a. $13.64
ANS: C b. $15.00
36. The U.S. dollar is not ever used as a medium of exchange in: c. $16.50
a. industrialized countries outside the U.S. d. 16.50 euros
b. in any Latin American countries. e. none of the above
c. in Eastern European countries where foreign exchange restrictions exist. ANS: C SOLU-TION: 15 * $1.10 = $16.50
d. none of the above 52. The ADR of a British firm is convertible into 3 shares of stock. The share price of the
ANS: D firm was 30 pounds when the British market closed. When the U.S. market opens, the
37. Which of the following is not true regarding the Bretton Woods Agreement? pound is worth $1.63. The price of this ADR should be $____.
a. It called for fixed exchange rates between currencies. a. 48.90
b. Governments intervened to prevent exchange rates from moving more than 1 percent b. 146.70
above or below their initially established levels. c. 55.21
c. The agreement lasted from 1944 until 1971. d. none of the above
d. Each country used gold to back its currency. ANS: B
e. All of the above are true regarding the Bretton Woods Agreement. SOLUTION: 3 * 30 * $1.63 = $146.70
ANS: D 69. In general, stock markets allow for more price efficiency and attract more investors
38. A Japanese yen is worth $.0080, and a Fijian dollar (F$) is worth $.5900. What is the when they have all of the following except:
value of the yen in Fijian dollars (i.e., how many Fijian dollars do you need to buy a yen)? a. more voting rights for shareholders.
a. 73.75. b. more legal protection.
b. 125. c. more enforcement of the laws.
c. 1.69. d. less stringent accounting requirements.
d. 0.014 ANS: D
71. If companies can rely on stock markets to obtain funds, they will have to rely more ANS: E
heavily on the ____ market to raise long-term funds. 77. The interest rate in developing countries is usually very low.
a. derivative a. True
b. long-term b. False
c.redit cmoney ANS: F
d. foreign exchange 78. Assume that $1 is equal to .85 Euros and 98 yen. The value of yen in euros is
ANS: B a. .01
73. Assume that the bank's bid quote of Mexican peso is $.126 and ask price is $.129. If b. 118
you have Mexican pesos, what is the amount of pesos that you need to purchase $100,000? c. 1.18
a. 12,600 d. .0087
b. 775,194 ANS: D
c. 793,651 79. When obtaining a loan, the risk premium paid above LIBOR depends on the:
d. 12,900 a. risk-free interest rate of the borrower.
ANS: C b. credit risk of the borrower.
75. An obligation to purchase a specific amount of currency at a future point in time is c. borrower's stock price.
called d. lender's stock price.
a: ANS: B
a. call option 80. The largest global exchange is:
b. spot contract a. NASDAQ
c. put option b. Tokyo Stock Exchange
d. forward contract c. NYSE Euronext
e. both B and D d. London Stock Exchange
ANS: D ANS: C
76. Which of the following is not a method that can be used to invest internationally? 81. Which of the following is not true about syndicated loans?
a. Investment in MNC stocks a. A borrower that receives a syndicated loan incurs various fees besides the interest rate.
b. American depository receipts (ADRs) b. The loans are only denominated in U.S. dollars.
c. World Equity benchmark Shares (WEBS) c. The loans are provided by a group of banks to a borrower.
d. International mutual funds d. The loans are usually formed in 6 weeks or less.
e. All of the above are methods that can be used to invest internationally. ANS: B
82. The interest rate on the syndicated loan depends on the: 86. Which of the following is not true regarding ADRs?
a. currency denominating the loan. a. ADRs are denominated in the currency of the stock's home country.
b. maturity of the loan. b. ADRs enable U.S. investors to avoid cross-border transactions
c. creditworthiness of the borrower. c. ADRs allow non-U.S. firms to tap into U.S. market for funds.
d. interbank lending rate. d. ADRs sometimes allow for arbitrage opportunities.
e. all of the above. ANS: A
ANS: E 94. Which of the following is not a possible bid/ask quotation for the Barbados dollar?
83. Assume a U.S. firm has to pay for Korean imports in 60 days. It expects that Korean a. $.50/$.51
won will depreciate, but it still wants to hedge its risk. What type of hedging is more b. $.49/$.50
appropri-ate in this situation: c. $.52/$.51
a. Buy dollars forward d. $.51/$.52
b. Sell dollars forward e. All of the above are possible bid/ask quotations.
c. Purchase call option ANS: C
d. Purchase put option 95. Your company expects to receive 5,000,000 Japanese yen 60 days from now. You
ANS: C decide to hedge your position by selling Japanese yen forward. The current spot rate of the
84. Certificates representing bundles of stock of non-U.S. firms are called: yen is $.0089, while the forward rate is $.0095. You expect the spot rate in 60 days to be
a. Eurobonds $.0090. How many dollars will you receive for the 5,000,000 yen 60 days from now if you
b. ADRs sell yen forward?
c. FRNs a. $44,500
d. Eurobor b. $45,000
ANS: B c. $526 million
85. Assume that the spot rate of the Singapore dollar is $.664. The ADR of a Singapore d. $47,500
firm is convertible into 3 shares of stock. The price of an ADR is $20. What is the share e. $556 million
price of the firm in Singapore dollars? ANS: D
a. 10 96. Which of the following is probably not an example of the use of forward contracts by
b. 13.28 an MNC?
c. 30.12 a. Hedging pound payables by selling pounds forward
d. 39.84 b. Hedging peso receivables by selling pesos forward
ANS: A c. Hedging yen payables by purchasing yen forward
d. Hedging peso payables by purchasing pesos forward 100. Which of the following is probably not appropriate for an MNC wishing to reduce its
e. All of the above are examples of using forward contracts. exposure to British pound payables?
ANS: A a. Purchase pounds forward
97. A quotation representing the value of a foreign currency in dollars is referred to as a(n) b. Buy a pound futures contract
____ quotation; a quotation representing the number of units of a foreign currency per c. Buy a pound put option
dollar is referred to as a(n) ____ quotation. d. Buy a pound call option
a. direct; indirect ANS: C
b. indirect; direct 101. Futures contracts are sold on exchanges and are consequently ____ than forward
c. direct; direct contracts, which can be ____ to satisfy an MNC's needs.
d. indirect; indirect a. more standardized; standardized
e. cannot be answered without more information b. more standardized; custom-tailored
ANS: A c. more custom-tailored; standardized
98. You observe a quotation of the Japanese yen (¥) of $0.007. You are, however, d. more custom-tailored; custom-tailored
interested e. less standardized; custom-tailored
in the number of yen per dollar. Thus, you calculate the ____ quotation of ____ ¥/$. ANS: B
a. direct; 142.86 102. An MNC's short-term financing decisions are satisfied in the ____ market, while its
b. indirect; 142.86 medium debt financing decisions are satisfied in the ____ market.
c. indirect; 150 a. international money; international credit
d. direct; 150 b. international money; international bond
e. indirect; 0 c. international credit; international money
ANS: B d. international bond; international credit
99. Which of the following is not true regarding electronic communications networks e. international money; international stock
(ECNs)? ANS: A
a. They have a visible trading floor. Chapter 5: Currency Derivatives
b. Trades are executed by a computer network. 1. Kalons, Inc. is a U.S.-based MNC that frequently imports raw materials from Canada.
c. They have been created in many countries to match orders between buyers and sellers. Kalons is typically invoiced for these goods in Canadian dollars and is concerned that the
d. They allow investors to place orders on their computers. Canadian dollar will appreciate in the near future. Which of the following is not an
e. All of the above are true. appropriate hedging technique under these circumstances?
ANS: A a. purchase Canadian dollars forward.
b. purchase Canadian dollar futures contracts. a. 1.9 percent discount.
c. purchase Canadian dollar put options. b. 1.9 percent premium.
d. purchase Canadian dollar call options. c. 7.6 percent premium.
ANS: C d. 7.6 percent discount.
2. Graylon, Inc., based in Washington, exports products to a German firm and will receive ANS: C
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 is $1.15. 5. Thornton, Inc. needs to invest five million Nepalese rupees in its Nepalese subsidiary to

Graylon will receive $____ for the euros. support local operations. Thornton would like its subsidiary to repay the rupees in one year.

a. 224,000 Thornton would like to engage in a swap transaction. Thus, Thornton would:

b. 220,000 a. convert the rupees to dollars in the spot market today and convert rupees to dollars in one

c. 200,000 year at today's forward rate.

d. 230,000 b. convert the dollars to rupees in the spot market today and convert dollars to rupees in

ANS: B one year at the prevailing spot rate.

c. convert the dollars to rupees in the spot market today and convert rupees to dollars in one
year at today's forward rate.
d. convert the dollars to rupees in the spot market today and convert rupees to dollars in
3. The one-year forward rate of the British pound is quoted at $1.60, and the spot rate of one year at the prevailing spot rate.
the British pound is quoted at $1.63. The forward ____ is ____ percent. ANS: C
a. discount; 1.9 6. In the U.S., the typical currency futures contract is based on a currency value in terms of:
b. discount; 1.8 a. euros.
c. premium; 1.9 b. U.S. dollars.
d. premium; 1.8 c. British pounds.
ANS: B d. Canadian dollars.
ANS: B
7. Currency futures contracts sold on an exchange:
a. contain a commitment to the owner, and are standardized.
4. The 90-day forward rate for the euro is $1.07, while the current spot rate of the euro is b. contain a commitment to the owner, and can be tailored to the desire of the owner.
$1.05. What is the annualized forward premium or discount of the euro?
c. contain a right but not a commitment to the owner, and can be tailored to the desire of c. obtain a forward contract to purchase francs forward.
the owner. d. all of the above are appropriate strategies for the scenario described.
d. contain a right but not a commitment to the owner, and are standardized. ANS: B
ANS: A 12. Which of the following is the most unlikely strategy for a U.S. firm that will be
8. Currency options sold through an options exchange: purchasing Swiss francs in the future and desires to avoid exchange rate risk (assume the
a. contain a commitment to the owner, and are standardized. firm has no offsetting position in francs)?
b. contain a commitment to the owner, and can be tailored to the desire of the owner. a. purchase a call option on francs.
c. contain a right but not a commitment to the owner, and can be tailored to the desire of b. obtain a forward contract to purchase francs forward.
the owner. c. sell a futures contract on francs.
d. contain a right but not a commitment to the owner, and are standardized. d. all of the above are appropriate strategies for the scenario described.
ANS: D ANS: C
9. Currency options are commonly traded through the ____ system. 13. If your firm expects the euro to substantially depreciate, it could speculate by ____ euro
a. robot call options or ____ euros forward in the forward exchange market.
b. Euro a. selling; selling
c. GLOBEX b. selling; purchasing
d. Scope c. purchasing; purchasing
ANS: C d. purchasing; selling
10. Forward contracts: ANS: A
a. contain a commitment to the owner, and are standardized. 14. When you own ____, there is no obligation on your part; however, when you own
b. contain a commitment to the owner, and can be tailored to the desire of the owner. ____, there is an obligation on your part.
c. contain a right but not a commitment to the owner, and can be tailored to the desire of a. call options; put options
the owner. b. futures contracts; call options
d. contain a right but not a commitment to the owner, and are standardized. c. forward contracts; futures contracts
ANS: B d. put options; forward contracts
11. Which of the following is the most likely strategy for a U.S. firm that will be receiving ANS: D
Swiss francs in the future and desires to avoid exchange rate risk (assume the firm has no 15. The greater the variability of a currency, the ____ will be the premium of a call option
offsetting position in francs)? on this currency, and the ____ will be the premium of a put option on this currency, other
a. purchase a call option on francs. things equal.
b. sell a futures contract on francs. a. greater; lower
b. greater; greater The premium of the option is $.05
c. lower; greater (31,250 units) = $1,562.50.
d. lower; lower Since the option will not be exercised, the net profit is -$1,562.50.
ANS: B 19. Which of the following is true?
16. When currency options are not standardized and traded over-the-counter, there is ____ a. The futures market is primarily used by speculators while the forward market is
liquidity and a ____ bid/ask spread. primarily used for hedging.
a. less; narrower b. The futures market is primarily used for hedging while the forward market is primarily
b. more; narrower used for speculating.
c. more; wider c. The futures market and the forward market are primarily used for specu-lating.
d. less; wider d. The futures market and the forward market are primarily used for hedging.
ANS: D ANS: A
17. The shorter the time to the expiration date for a currency, the ____ will be the premium 20. Which of the following is true?
of a call option, and the ____ will be the premium of a put option, other things equal. a. Most forward contracts between firms and banks are for speculative purposes.
a. greater; greater b. Most future contracts represent a conservative approach by firms to hedge foreign trade.
b. greater; lower c. The forward contracts offered by banks have maturities for only four possible dates in
c. lower; lower the future.
d. lower; greater d. none of the above
ANS: C ANS: D
18. Assume that a speculator purchases a put option on British pounds (with a strike price 21. If you expect the euro to depreciate, it would be appropriate to ____ for speculative
of $1.50) for $.05 per unit. A pound option represents 31,250 units. Assume that at the time purposes.
of the purchase, the spot rate of the pound is $1.5and continually rises to $1.62 by the a. buy a euro call and buy a euro put
expiration date. The highest net profit possible for the speculator based on the information b. buy a euro call and sell a euro put
above is: c. sell a euro call and sell a euro put
a. $1,562.50. d. sell a euro call and buy a euro put
b. -$1,562.50. ANS: D
c. -$1,250.00. 22. If you expect the British pound to appreciate, you could speculate by ____ pound call
d. -$625.00. options or ____ pound put options.
ANS: B a. purchasing; selling
SOLUTION: b. purchasing; purchasing
c. selling; selling a. put upward pressure on; put upward pressure on
d. selling; purchasing b. put downward pressure on; put upward pressure on
ANS: A c. put upward pressure on; put downward pressure on
23. Which of the following is correct? d. put downward pressure on; put downward pressure on
a. The longer the time to maturity, the less the value of a currency call option, other things ANS: C
equal. 27. A firm sells a currency futures contract, and then decides before the settlement date that
b. The longer the time to maturity, the less the value of a currency put option, other things it no longer wants to maintain such a position. It can close out its position by:
equal. a. buying an identical futures contract.
c. The higher the spot rate relative to the exercise price, the greater the value of a currency b. selling an identical futures contract.
put option, other things equal. c. buying a futures contract with a different settlement date.
d. The lower the exercise price relative to the spot rate, the greater the value of a currency d. selling a futures contract for a different amount of currency.
call option, other things equal. e. purchasing a put option contract in the same currency.
ANS: D ANS: A
24. Research has found that the options market is: 28. If the spot rate of the euro increased substantially over a one-month period, the futures
a. efficient before controlling for transaction costs. price on euros would likely ____ over that same period.
b. efficient after controlling for transaction costs. a. increase slightly
c. highly inefficient. b. decrease substantially
d. none of the above c. increase substantially
ANS: B d. stay the same
25. Assume no transactions costs exist for any futures or forward contracts. The price of ANS: C
British pound futures with a settlement date 180 days from now will: 29. A U.S. firm is bidding for a project needed by the Swiss government. The firm will not
a. definitely be above the 180-day forward rate. know if the bid is accepted until three months from now. The firm will need Swiss francs to
b. definitely be below the 180-day forward rate. cover expenses but will be paid by the Swiss government in dollars if it is hired for the
c. be about the same as the 180-day forward rate. project. The firm can best insulate itself against exchange rate exposure by:
d. none of the above; there is no relation between the futures and forward prices. a. selling futures in francs.
ANS: C b. buying futures in francs.
26. Assume that a currency's spot and future prices are the same, and the currency's interest c. buying franc put options.
rate is higher than the U.S. rate. The actions of U.S. investors to lock in this higher foreign d. buying franc call options.
return would ____ the currency's spot rate and ____ the currency's futures price. ANS: D
30. A firm wants to use an option to hedge 12.5 million in receivables from New Zealand SOLUTION:
firms. The premium is $.03. The exercise price is $.55. If the option is exercised, what is Break-even point on put option to both the buyer and seller is $1.60 - $.03 = $1.57.
the total amount of dollars received (after accounting for the premium paid)? 33. The existing spot rate of the Canadian dollar is $.82. The premium on a Canadian dollar
a. $6,875,000. call option is $.04. The exercise price is $.81. The option will be exercised on the expira-
b. $7,250,000. tion date if at all. If the spot rate on the expiration date is $.87, the profit as a percent of the
c. $7,000,000. initial investment (the premium paid) is:
d. $6,500,000. a. 0 percent.
e. none of the above b. 25 percent.
ANS: D c. 50 percent.
SOLUTION: d. 150 percent.
Dollars received from exercising option = NZ$12.5 million  $.55 = $6,875,000. e. none of the above
Premium paid for options = NZ$12.5 million  $.03 = $375,000. ANS: C
Amount of dollars received minus premium = $6,500,000. SOLUTION:
31. If you purchase a straddle on euros, this implies that you: The net profit per unit is: $.87 - $.8- $.04 = $.02.
a. finance the purchase of a call option by selling a put option in the euros. The net profit per unit as a percent of the initial investment per unit is: $.02/$.04 = 50%.
b. finance the purchase of a call option by selling a call option in the euros. 34. You purchase a call option on pounds for a premium of $.03 per unit, with an exercise
c. finance the purchase of a put option by selling a put option in the euros. price of $1.64; the option will not be exercised until the expiration date, if at all. If the spot
d. finance the purchase of a put option by selling a call option in the euros. rate on the expiration date is $1.65, your net profit per unit is:
e. none of the above a. -$.03.
ANS: E b. -$.02.
32. The premium on a pound put option is $.03 per unit. The exercise price is $1.60. The c. -$.01.
break-even point is ____ for the buyer of the put, and ____ for the seller of the put. (As- d. $.02.
sume zero transactions costs and that the buyer and seller of the put option are speculators.) e. none of the above
a. $1.63; $1.63 ANS: B
b. $1.63; $1.60 SOLUTION:
c. $1.63; $1.57 Net profit per unit = $1.65 - $1.64 - $.03 = -$.02.
d. $1.57; $1.63 35. You purchase a put option on Swiss francs for a premium of $.02, with an exercise
e. none of the above price of $.61. The option will not be exercised until the expiration date, if at all. If the spot
ANS: E rate on the expiration date is $.58, your net profit per unit is:
a. -$.03. ANS: E
b. -$.02. SOLUTION:
c. -$.01. Net profit = $.78 + $.03 - $.86 = -$.05.
d. $.02. 38. European currency options can be exercised ____; American currency options can be
e. none of the above exercised ____.
ANS: E a. any time up to the expiration date; any time up to the expiration date
SOLUTION: b. any time up to the expiration date; only on the expiration date
Net profit per unit = $.6- $.58 - $.02 = $.01. c. only on the expiration date; only on the expiration date
36. You are a speculator who sells a call option on Swiss francs for a premium of $.06, d. only on the expiration date; any time up to the expiration date
with an exercise price of $.64. The option will not be exercised until the expiration date, if ANS: D
at all. If the spot rate of the Swiss franc is $.69 on the expiration date, your net profit per 39. Macomb Corporation is a U.S. firm that invoices some of its exports in Japanese yen. If
unit, assuming that you have to buy Swiss francs in the market to fulfill your obligation, is: it expects the yen to weaken, it could ____ to hedge the exchange rate risk on those
a. -$.02. exports.
b. -$.01. a. sell yen put options
c. $.01. b. buy yen call options
d. $.02. c. buy futures contracts on yen
e. none of the above d. sell futures contracts on yen
ANS: C ANS: D
SOLUTION: 40. A call option on Australian dollars has a strike (exercise) price of $.56. The present
Net profit per unit = $.64 + $.06 - $.69 = $.01. exchange rate is $.59. This call option can be referred to as:
37. You are a speculator who sells a put option on Canadian dollars for a premium of $.03 a. in the money.
per unit, with an exercise price of $.86. The option will not be exercised until the expira- b. out of the money.
tion date, if at all. If the spot rate of the Canadian dollar is $.78 on the expiration date, your c. at the money.
net profit per unit is: d. at a discount.
a. -$.08. ANS: A
b. -$.03. 41. A put option on British pounds has a strike (exercise) price of $1.48. The present
c. $.05. exchange rate is $1.55. This put option can be referred to as:
d. $.08. a. in the money.
e. none of the above b. out of the money.
c. at the money. 45. Which of the following would result in a profit of a euro futures contract when the euro
d. at a discount. depreciates?
ANS: B a. buy a euro futures contract; sell a futures contract after the euro has depreciated.
42. Which of the following is not an instrument used by U.S.-based MNCs to cover their b. sell a euro futures contract; buy a futures contract after the euro has depreciated.
foreign currency positions? c. buy a euro futures contract; buy an additional futures contract after the euro has
a. forward contracts. depreciated.
b. futures contracts. d. none of the above would result in a profit when the euro depreciates.
c. non-deliverable forward contracts. ANS: B
d. options. 46. Which of the following is not true regarding options?
e. all of the above are instruments used to cover foreign currency positions. a. Options are traded on exchanges, never over-the-counter.
ANS: E b. Similar to futures contracts, margin requirements are normally imposed on option
43. When the futures price on euros is below the forward rate on euros for the same settle- traders.
ment date, astute investors may attempt to simultaneously ____ euros forward and ____ c. Although commissions for options are fixed per transaction, multiple contracts may be
euro futures. involved in a transaction, thus lowering the commission per contract.
a. sell; sell d. Currency options can be classified as either put or call options.
b. buy; sell e. All of the above are true.
c. sell; buy ANS: A
d. buy; buy 47. A U.S. corporation has purchased currency put options to hedge a 100,000 Canadian
ANS: B dollar (C$) receivable. The premium is $.0and the exercise price of the option is $.75. If the
44. When the futures price is equal to the spot rate of a given currency, and the foreign spot rate at the time of maturity is $.85, what is the net amount received by the corporation
country exhibits a higher interest rate than the U.S. interest rate, astute investors may if it acts rationally?
attempt to simultaneously ____ the foreign currency, invest it in the foreign country, and a. $74,000.
____ futures in the foreign currency. b. $84,000.
a. buy; buy c. $75,000.
b. sell; buy d. $85,000.
c. buy; sell ANS: B
d. buy; buy SOLUTION:
ANS: C
Dollars received from selling Canadian dollars in the spot market = C$100,000  $.85 = $1.5and a premium of $.02. If the spot rate at the option's maturity turns out to be $1.54,
$85,000. Premium paid for options = C$100,000  $.0= $1,000. Amount of dollars what is Carl's profit or loss per unit (assuming the buyer of the option acts rationally)?
received less premium = $84,000. a. -$0.01.
48. A U.S. corporation has purchased currency call options to hedge a 70,000 pound b. $0.01.
payable. The premium is $.02 and the exercise price of the option is $.50. If the spot rate at c. -$0.04.
the time of maturity is $.65, what is the total amount paid by the corporation if it acts d. $0.04.
rationally? e. -$0.03.
a. $33,600. ANS: A
b. $46,900. SOLUTION:
c. $44,100. The net profit per unit is $1.5+ $.02 - $1.54 = - $.01.
d. $36,400. 51. Johnson, Inc., a U.S.-based MNC, will need 10 million Thai baht on August 1. It is now
ANS: D May 1. Johnson has negotiated a non-deliverable forward contract with its bank. The
SOLUTION: reference rate is the baht's closing exchange rate (in $) quoted by Thailand's central bank in
Dollars paid when exercising the option = £70,000  $.50 = $35,000. 90 days. The baht's spot rate today is $.02. If the rate quoted by Thailand's central bank on

Premium paid for options = £70,000  $.02 = $1,400. August is $.022, Johnson will ____ $____.

Amount of dollars paid = $35,000 + $1,400 = $36,400. a. pay; 20,000

49. Frank is an option speculator. He anticipates the Danish kroner to appreciate from its b. be paid; 20,000

current level of $.19 to $.21. Currently, kroner call options are available with an exercise c. pay; 2,000

price of $.18 and a premium of $.02. Should Frank attempt to buy this option? If the future d. be paid; 2,000

spot rate of the Danish kroner is indeed $.21, what is his profit or loss per unit? e. none of the above

a. no; -$0.01. ANS: B

b. yes; $0.01. SOLUTION:

c. yes; -$0.01. Amount received per unit = $.022 - $.02 = $.002  THB10,000,0000 = $20,000.

d. yes; $0.03. 52. If the observed put option premium is less than what is suggested by the put-call parity

ANS: B equation, astute arbitrageurs could make a profit by ____ the put option, ____ the call

SOLUTION: option, and ____ the underlying currency.

The net profit per unit is: $.2 - $.18 - $.02 = $.01. a. selling; buying; buying

50. Carl is an option writer. In anticipation of a depreciation of the British pound from its b. buying; selling; buying

current level of $1.50 to $1.45, he has written a call option with an exercise price of c. selling; buying; selling
d. buying; buying; buying a. discount; 11.11%
ANS: B b. premium; 11.11%
53. A put option premium has a lower bound that is equal to the greater of zero and the c. premium; 10.81%
difference between the underlying ____ prices. The upper bound of a call option premium d. discount; 10.81%
is the ____ price. ANS: D
a. spot and exercise; exercise SOLUTION:
b. spot and exercise; spot Discount = [(FR - SR)/SR]  (360/90) = [($.36 - $.37)/$.37]  (360/90) = - 10.81%
c. exercise and spot; exercise (Discount)
d. exercise and spot; spot 57. Which of the following are most commonly traded on an exchange?
ANS: C a. forward contracts.
54. A call option premium has a lower bound that is equal to the greater of zero and the b. futures contracts.
difference between the underlying ____ prices. The upper bound of a call option premium c. currencies
is the ____ price. d. none of the above
a. spot and exercise; exercise ANS: B
b. spot and exercise; spot 58. Conditional currency options are:
c. exercise and spot; exercise a. options that do not require premiums.
d. exercise and spot; spot b. options where the premiums are canceled if a trigger level is reached.
ANS: B c. options that allow the buyer to decide what currency the option will be settled in.
55. Assume the spot rate of the Swiss franc is $.62 and the one-year forward rate is $.66. d. none of the above
The forward rate exhibits a ____ of ____. ANS: B
a. premium; about 6% 59. Which of the following is true regarding the options markets?
b. discount; about 6% a. Hedgers and speculators both attempt to lower risk.
c. discount; about 6.45% b. Hedgers attempt to lower risk, while speculators attempt to make riskless profits.
d. premium; about 6.45% c. Hedgers and speculators are both necessary in order for the market to be liquid.
ANS: D d. all of the above
SOLUTION: ANS: C
Premium = (Forward rate - Spot rate)/Spot rate = ($.66 - $.62)/$.62 = 6.45% 60. The premium of a currency put option will increase if:
56. Assume the spot rate of a currency is $.37 and the 90-day forward rate is $.36. The a. the volatility of the underlying asset goes up.
forward rate of this currency exhibits a ____ of ____ on an annualized basis. b. the time to maturity goes up.
c. the spot rate declines. a. actual delivery.
d. none of the above b. no transactions costs.
ANS: D c. self regulation.
61. Which of the following is true of options? d. none of the above
a. The writer decides whether the option will be exercised. ANS: D
b. The writer pays the buyer the option premium. 66. Your company expects to receive 5,000,000 Japanese yen 60 days from now. You
c. The buyer decides if the option will be exercised. decide to hedge your position by selling Japanese yen forward. The current spot rate of the
d. More than one of these. yen is $.0089, while the forward rate is $.0095. You expect the spot rate in 60 days to be
ANS: C $.0090. How many dollars will you receive for the 5,000,000 yen 60 days from now?
62. The purchase of a currency put option would be appropriate for which of the following? a. $44,500.
a. Investors who expect to buy a foreign bond in one month. b. $45,000.
b. Corporations who expect to buy foreign currency to finance foreign subsidiaries. c. $526 million.
c. Corporations who expect to collect on a foreign account receivable in one month. d. $47,500.
d. all of the above ANS: D
ANS: B SOLUTION:
63. If you have bought the right to sell, you are a: ¥5,000,000  $.0095/¥ = $47,500
a. call writer. 67. The spot rate for the Singapore dollar is $.588. The 30-day forward rate is $.590. The
b. put buyer. forward rate contains an annualized ____ of ____%.
c. futures buyer. a. discount; -4.07
d. put writer. b. premium; 4.07
ANS: B c. discount; -4.08
d. premium; 4.08
64. If you have a position where you might be obligated to buy Euros, you are: e. premium; 3.40
a. a call writer. ANS: D
b. a put writer. SOLUTION:
c. a put buyer. ($.59 - $.588)/$.588  (360/30) = 4.08%
d. a futures seller. 105. The 180-day forward rate for the euro is $1.34, while the current spot rate of the euro
ANS: C is $1.29. What is the annualized forward premium or discount of the euro?
65. Which of the following is true for futures, but not for forwards? a. 7.46% premium
b. 7.46% discount c. $1.37
c. 7.75% premium d. $1.46
d. 7.75% discount ANS: D
ANS: C SOLUTION:
SOLUTION: $1.49  (1- .02) = $1.46
[(F/S) - 1]  360/180 = [($1.34/$1.29) - 1]  360/180 = 7.75% 109. The spot rate of euro is quoted at $1.29. The annualized forward premium on the euro
106. The annualized forward premium on the euro is 7%. What is the 90-day forward rate is 10%. What is the 30-day forward rate of the euro?
on a. $1.28
the euro if the spot rate today is $1.25? b. $1.30
a. $1.27 c. $1.42
b. $1.34 d. $1.16
c. $1.16 ANS: B
d. $1.23 SOLUTION:
ANS: A $1.29  [1+ 0.10/(360/30)] = $1.30
SOLUTION: 110. The premium on a euro call option is $.02. The exercise price is $1.32. The break-
$1.25  [+ 7%/(360/90)] = $1.27 even point is ____ for the buyer of the call, and ____ for the seller of the call. (Assume
107. The one-year forward rate of the Japanese yen is quoted at $.013, and the spot rate of zero transactions costs and that the buyer and seller of the put option are speculators.)
Japanese yen is quoted at $.011. The forward ____ is ____ percent. a. $1.30; $1.30
a. discount; 18.18 b. $1.34; $1.30
b. premium; 18.18 c. $1.30; $1.34
c. discount; 15.38 d. $1.34; $1.34
d. premium; 15.38 ANS: D
ANS: B SOLUTION:
SOLUTION Break-even point on call option to both the buyer and seller is $1.32 + $.02 = $1.34.
(F/S) -1 = ($.013/$.011) -1 = 18.18% 111. If you have a position where you might be obligated to sell pounds, you are:
108. The spot rate of British pound is quoted at $1.49. The 90-day forward rate exhibits a a. a call writer.
2% discount. What is the 90-day forward rate of the pound? b. a call buyer.
a. $1.52 c. a put writer.
b. $1.6 d. a put buyer.
ANS: A 116. Crown Co. is expecting to receive 100,000 British pounds in one year. Crown expects
112. If you have bought a right to buy foreign currency, you are: the spot rate of British pound to be $1.49 in a year, so it decides to avoid exchange rate risk
a. a call writer. by hedging its receivables. The spot rate of the pound is quoted at $1.51. The strike price of
b. a call buyer. put and call options are $1.54 and $1.53 respectively. The premium on both options is $.03.
c. a put writer. The one-year forward rate exhibits a 2.65% premium. Assume there are no transaction
d. a put buyer. costs. What is the best possible hedging strategy and how many U.S. dollars Crown Co.
ANS: B will receive under this strategy?
113. The premium on a pound put option is $.04. The spot rate and the exercise price is a. buy a put option and receive $150,000.
$1.52. The spot rate at the time of this option expiration is expected to be $1.51. The b. sell pounds forward and receive $155,000.
speculators could profit by: c. sell a call option and receive $156,000.
a. writing a put option. d. sell a put option and receive $157,000.
b. buying a put option. ANS: B
c. buying a call option SOLUTION:
d. writing a call option and buying a call option simultaneously. There are only two feasible choices for hedging in these circumstances: selling pounds
ANS: D forward or buying a put option.
114. A call option on Japanese yen has a strike (exercise) price of $.012. The present Sell pounds forward:
exchange rate is $.011. This call option can be referred to as: One-year forward rate = $1.5  (+ .0265) = $1.55
a. in the money. Dollars received = 100,000  $1.55 = $155,000
b. out of the money. Buy put option:
c. at the money. Amount received per unit = $1.54 - $.03 = $1.51
d. at a discount. Total amount of receivables in U.S.$ = 100,000  $1.51= $151,000
ANS: B 117. J&L Co. is a U.S.-based MNC that frequently exports computers to Italy. J&L
115. A put option on Swiss franc has a strike (exercise) price of $.92. The present exchange typically invoices these goods in euros and is concerned that the euro will depreciate in the
rate is $.89. This put option can be referred to as: near future. Which of the following is not an appropriate technique under these
a. in the money. circumstances?
b. out of the money. a. purchase euro put options.
c. at the money. b. sell euros forward.
d. at a discount. c. sell euro futures contracts.
ANS: A d. sell euro put options.
ANS: D Profit/loss from transaction = (100,000,000  $.0084) - (100,000,000  .009) = $60,000
118. The ____ the existing spot price relative to the strike price, the ____ valuable the call loss.
options will be. 121. Assume that a speculator received news that makes her believe that the yen will
a. higher; less appreciate or depreciate substantially in the near future, but she is not certain of the
b. higher; more direction. Also assume that exercise price of call and put options are the same. The most
c. lower; less appropriate method for speculation is ____and it may be achieved by ____.
d. lower; more a. straddle; purchase put option and purchase call option.
ANS: A b. strangle; purchase put option and sell call option.
119. The ____ the existing spot price relative to the strike price, the ____ valuable the put c. strangle; sell put option and sell put option.
options will be. d. straddle; sell put option and buy call option.
a. higher; less ANS: A
b. higher; more 122. Which of the following does not represent the risk from using forward contracts?
c. lower; less a. if a forward contract is used to hedge receivables, and the spot exchange rate at the
d. lower; more expiration of contract exceeds the contract price.
ANS: D b. if a forward contract is used to hedge receivables, and the spot exchange rate at the time
120. On January 1st, Madison Co. ordered raw material from Japan and agreed to pay 100 of expiration of contract is lower than the contract price.
million yen for this order on April 1st. It negotiated a 3-month forward contract to obtain c. if a forward contract is used to hedge payables, and the spot exchange rate at the time of
100 million Japanese yen on that date at $.009. On February 1st, the Japanese firm expiration of contract is lower than the contract price.
informed Madison Co. that it won't be able to fulfill that order. The Japanese yen spot rate d. if a forward contract is used to hedge payables or receivables and the amount to be
on February 1st is $.0087 and 2-month forward rate exhibits 3% discount. To offset its received or paid is cancelled.
existing contract Madison Co. will negotiate a forward contract to ____ for the date of ANS: B
April 1st and the profit/loss generated from this transaction is a ____ U.S. dollars. 150. A forward rate for a currency is said to exhibit a discount if
a. sell yen; gain of $60,000 a. the forward rate exceeds the existing spot rate.
b. sell yen; loss of $60,000 b. the forward rate is less than the existing spot rate.
c. buy yen; gain of $30,000 c. the forward rate exceeds the expected future spot rate.
d. to buy yen; loss of $30,000 d. the forward rate is less than the expected future spot rate.
ANS: B e. none of the above
SOLUTION: ANS: B
2-month forward rate = $.0087  (1- .03) = $.0084 151.
If the spot rate of the British pound is $1.50, and the one-year forward rate has a discount d. 87,062.50
of 3 percent, the one-year forward rate is $____. ANS: B
a. 1.50 155. Which of the following would result in a profit of a futures contract when the
b. 1.47 underlying
c. 1.55 currency depreciates?
d. 1.46 a. Buy a futures contract; sell a futures contract after the currency has depreciated
e. None of the above b. Sell a futures contract; buy a futures contract after the currency has depreciated
ANS: D c. Buy a futures contract; buy an additional futures contract after the currency has
152. Which of the following is not true regarding futures contracts? depreciated
a. Unlike forward contracts, they are generally traded on an exchange. d. None of the above would result in a profit when the underlying currency of the futures
b. Futures contracts are standardized with respect to delivery date and size of the contract. contract depreciates.
c. There is an active over-the-counter market for currency futures contracts. ANS: B
d. Currency futures can be used by speculators who attempt to profit from exchange rate 156. Currency futures can be used by MNCs to hedge payables. That is, an MNC would
movements. ____ futures to hedge a foreign payable position. Also, currency futures can be used for
ANS: C speculation. For example, a speculator expecting a currency to appreciate would ____
153. When the futures price is above the forward rate, astute investors may attempt to futures.
simultaneously buy a currency forward and sell futures in that currency. These actions a. buy; buy
would place ____ pressure on the forward rate and ____ pressure on the futures rate. b. sell; sell
a. upward; downward c. buy; sell
b. upward; upward d. sell; buy
c. downward; upward ANS: A
d. downward; downward 157. Which of the following is not true regarding options?
ANS: A a. Options are traded on exchanges, never over-the-counter.
154. Assume that the British pound (£) futures price for September is $1.60. Given that b. Similar to futures contracts, margin requirements are normally imposed on option
62,500 units are in a British pound futures contract, the seller of British pound futures will traders.
receive $____ on the delivery date. c. Although commissions for options are fixed per transaction, multiple contracts may be
a. 39,062.50 involved in a transaction, thus lowering the commission per contract.
b. 100,000 d. Currency options can be classified as either put or call options.
c. 48,000 e. All of the above are true.
ANS: A are available with an exercise price of $0.88 and a premium of $0.02. If the future spot rate
158. When the existing spot rate exceeds the exercise price, a call option is ____, and a put of the Canadian dollar is $0.85, what is Andrea's profit or loss per unit?
option is ____. a. $0.03
a. out of the money; in the money b. $0.05
b. out of the money; out of the money c. $0.0
c. in the money; in the money d. $0.04
d. in the money; out of the money ANS: C
ANS: D 162. Which of the following is not true regarding options?
159. When a currency call option is classified as "in the money," this indicates that a. The buyer of a call option has the right to buy the currency at the strike price.
a. the spot rate of the currency is less than the exercise price of the option. b. The writer of a call option has the obligation to sell the currency to the buyer if the
b. the spot rate of the currency is greater than the exercise price of the option. option if exercised.
c. the buyer of the option would generate a profit; that is, the spot rate would exceed the c. The buyer of a put option has the right to sell the currency at the strike price.
sum of the exercise price and the premium paid. d. The writer of a put option has the obligation to sell the currency to the buyer if the option
d. the buyer of the option would generate a profit; that is, the exercise price would exceed is exercised.
the sum of the spot rate and the premium paid. ANS: D
ANS: B 163. If the observed put option premium is less than what is suggested by the put-call
160. A U.S. corporation has purchased currency call options to hedge a 70,000 pound (£) parity equation, astute arbitrageurs could make a profit by ____ the put option, ____ the
payable. The premium is $0.02 and the exercise price of the option is $0.50. If the spot rate call option, and ____ the underlying currency.
at the time of maturity is $0.65, what is the total amount paid by the corporation if it acts a. selling; buying; buying
rationally? b. buying; selling; buying
a. $33,600 c. selling; buying; selling
b. $46,900 d. buying; buying; buying
c. $44,100 ANS: B
d. $36,400 Chapter 5: Currency Derivatives
ANS: D 1. Kalons, Inc. is a U.S.-based MNC that frequently imports raw materials from Canada.
161. Andrea is an option speculator. She anticipates the Canadian dollar to depreciate from Kalons is typically invoiced for these goods in Canadian dollars and is concerned that the
its current level of $0.90 to $0.85. Currently, Canadian dollar call options are available Canadian dollar will appreciate in the near future. Which of the following is not an
with an exercise price of $0.9and a premium of $0.02. Also, Canadian dollar put options appropriate hedging technique under these circumstances?
a. purchase Canadian dollars forward.
b. purchase Canadian dollar futures contracts. a. 1.9 percent discount.
c. purchase Canadian dollar put options. b. 1.9 percent premium.
d. purchase Canadian dollar call options. c. 7.6 percent premium.
ANS: C d. 7.6 percent discount.
2. Graylon, Inc., based in Washington, exports products to a German firm and will receive ANS: C
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 is $1.15. 5. Thornton, Inc. needs to invest five million Nepalese rupees in its Nepalese subsidiary to

Graylon will receive $____ for the euros. support local operations. Thornton would like its subsidiary to repay the rupees in one year.

a. 224,000 Thornton would like to engage in a swap transaction. Thus, Thornton would:

b. 220,000 a. convert the rupees to dollars in the spot market today and convert rupees to dollars in one

c. 200,000 year at today's forward rate.

d. 230,000 b. convert the dollars to rupees in the spot market today and convert dollars to rupees in

ANS: B one year at the prevailing spot rate.

c. convert the dollars to rupees in the spot market today and convert rupees to dollars in one
year at today's forward rate.
d. convert the dollars to rupees in the spot market today and convert rupees to dollars in
3. The one-year forward rate of the British pound is quoted at $1.60, and the spot rate of one year at the prevailing spot rate.
the British pound is quoted at $1.63. The forward ____ is ____ percent. ANS: C
a. discount; 1.9 6. In the U.S., the typical currency futures contract is based on a currency value in terms of:
b. discount; 1.8 a. euros.
c. premium; 1.9 b. U.S. dollars.
d. premium; 1.8 c. British pounds.
ANS: B d. Canadian dollars.
ANS: B
7. Currency futures contracts sold on an exchange:
a. contain a commitment to the owner, and are standardized.
4. The 90-day forward rate for the euro is $1.07, while the current spot rate of the euro is b. contain a commitment to the owner, and can be tailored to the desire of the owner.
$1.05. What is the annualized forward premium or discount of the euro?
c. contain a right but not a commitment to the owner, and can be tailored to the desire of c. obtain a forward contract to purchase francs forward.
the owner. d. all of the above are appropriate strategies for the scenario described.
d. contain a right but not a commitment to the owner, and are standardized. ANS: B
ANS: A 12. Which of the following is the most unlikely strategy for a U.S. firm that will be
8. Currency options sold through an options exchange: purchasing Swiss francs in the future and desires to avoid exchange rate risk (assume the
a. contain a commitment to the owner, and are standardized. firm has no offsetting position in francs)?
b. contain a commitment to the owner, and can be tailored to the desire of the owner. a. purchase a call option on francs.
c. contain a right but not a commitment to the owner, and can be tailored to the desire of b. obtain a forward contract to purchase francs forward.
the owner. c. sell a futures contract on francs.
d. contain a right but not a commitment to the owner, and are standardized. d. all of the above are appropriate strategies for the scenario described.
ANS: D ANS: C
9. Currency options are commonly traded through the ____ system. 13. If your firm expects the euro to substantially depreciate, it could speculate by ____ euro
a. robot call options or ____ euros forward in the forward exchange market.
b. Euro a. selling; selling
c. GLOBEX b. selling; purchasing
d. Scope c. purchasing; purchasing
ANS: C d. purchasing; selling
10. Forward contracts: ANS: A
a. contain a commitment to the owner, and are standardized. 14. When you own ____, there is no obligation on your part; however, when you own
b. contain a commitment to the owner, and can be tailored to the desire of the owner. ____, there is an obligation on your part.
c. contain a right but not a commitment to the owner, and can be tailored to the desire of a. call options; put options
the owner. b. futures contracts; call options
d. contain a right but not a commitment to the owner, and are standardized. c. forward contracts; futures contracts
ANS: B d. put options; forward contracts
11. Which of the following is the most likely strategy for a U.S. firm that will be receiving ANS: D
Swiss francs in the future and desires to avoid exchange rate risk (assume the firm has no 15. The greater the variability of a currency, the ____ will be the premium of a call option
offsetting position in francs)? on this currency, and the ____ will be the premium of a put option on this currency, other
a. purchase a call option on francs. things equal.
b. sell a futures contract on francs. a. greater; lower
b. greater; greater The premium of the option is $.05
c. lower; greater (31,250 units) = $1,562.50.
d. lower; lower Since the option will not be exercised, the net profit is -$1,562.50.
ANS: B 19. Which of the following is true?
16. When currency options are not standardized and traded over-the-counter, there is ____ a. The futures market is primarily used by speculators while the forward market is
liquidity and a ____ bid/ask spread. primarily used for hedging.
a. less; narrower b. The futures market is primarily used for hedging while the forward market is primarily
b. more; narrower used for speculating.
c. more; wider c. The futures market and the forward market are primarily used for specu-lating.
d. less; wider d. The futures market and the forward market are primarily used for hedging.
ANS: D ANS: A
17. The shorter the time to the expiration date for a currency, the ____ will be the premium 20. Which of the following is true?
of a call option, and the ____ will be the premium of a put option, other things equal. a. Most forward contracts between firms and banks are for speculative purposes.
a. greater; greater b. Most future contracts represent a conservative approach by firms to hedge foreign trade.
b. greater; lower c. The forward contracts offered by banks have maturities for only four possible dates in
c. lower; lower the future.
d. lower; greater d. none of the above
ANS: C ANS: D
18. Assume that a speculator purchases a put option on British pounds (with a strike price 21. If you expect the euro to depreciate, it would be appropriate to ____ for speculative
of $1.50) for $.05 per unit. A pound option represents 31,250 units. Assume that at the time purposes.
of the purchase, the spot rate of the pound is $1.5and continually rises to $1.62 by the a. buy a euro call and buy a euro put
expiration date. The highest net profit possible for the speculator based on the information b. buy a euro call and sell a euro put
above is: c. sell a euro call and sell a euro put
a. $1,562.50. d. sell a euro call and buy a euro put
b. -$1,562.50. ANS: D
c. -$1,250.00. 22. If you expect the British pound to appreciate, you could speculate by ____ pound call
d. -$625.00. options or ____ pound put options.
ANS: B a. purchasing; selling
SOLUTION: b. purchasing; purchasing
c. selling; selling a. put upward pressure on; put upward pressure on
d. selling; purchasing b. put downward pressure on; put upward pressure on
ANS: A c. put upward pressure on; put downward pressure on
23. Which of the following is correct? d. put downward pressure on; put downward pressure on
a. The longer the time to maturity, the less the value of a currency call option, other things ANS: C
equal. 27. A firm sells a currency futures contract, and then decides before the settlement date that
b. The longer the time to maturity, the less the value of a currency put option, other things it no longer wants to maintain such a position. It can close out its position by:
equal. a. buying an identical futures contract.
c. The higher the spot rate relative to the exercise price, the greater the value of a currency b. selling an identical futures contract.
put option, other things equal. c. buying a futures contract with a different settlement date.
d. The lower the exercise price relative to the spot rate, the greater the value of a currency d. selling a futures contract for a different amount of currency.
call option, other things equal. e. purchasing a put option contract in the same currency.
ANS: D ANS: A
24. Research has found that the options market is: 28. If the spot rate of the euro increased substantially over a one-month period, the futures
a. efficient before controlling for transaction costs. price on euros would likely ____ over that same period.
b. efficient after controlling for transaction costs. a. increase slightly
c. highly inefficient. b. decrease substantially
d. none of the above c. increase substantially
ANS: B d. stay the same
25. Assume no transactions costs exist for any futures or forward contracts. The price of ANS: C
British pound futures with a settlement date 180 days from now will: 29. A U.S. firm is bidding for a project needed by the Swiss government. The firm will not
a. definitely be above the 180-day forward rate. know if the bid is accepted until three months from now. The firm will need Swiss francs to
b. definitely be below the 180-day forward rate. cover expenses but will be paid by the Swiss government in dollars if it is hired for the
c. be about the same as the 180-day forward rate. project. The firm can best insulate itself against exchange rate exposure by:
d. none of the above; there is no relation between the futures and forward prices. a. selling futures in francs.
ANS: C b. buying futures in francs.
26. Assume that a currency's spot and future prices are the same, and the currency's interest c. buying franc put options.
rate is higher than the U.S. rate. The actions of U.S. investors to lock in this higher foreign d. buying franc call options.
return would ____ the currency's spot rate and ____ the currency's futures price. ANS: D
30. A firm wants to use an option to hedge 12.5 million in receivables from New Zealand SOLUTION:
firms. The premium is $.03. The exercise price is $.55. If the option is exercised, what is Break-even point on put option to both the buyer and seller is $1.60 - $.03 = $1.57.
the total amount of dollars received (after accounting for the premium paid)? 33. The existing spot rate of the Canadian dollar is $.82. The premium on a Canadian dollar
a. $6,875,000. call option is $.04. The exercise price is $.81. The option will be exercised on the expira-
b. $7,250,000. tion date if at all. If the spot rate on the expiration date is $.87, the profit as a percent of the
c. $7,000,000. initial investment (the premium paid) is:
d. $6,500,000. a. 0 percent.
e. none of the above b. 25 percent.
ANS: D c. 50 percent.
SOLUTION: d. 150 percent.
Dollars received from exercising option = NZ$12.5 million  $.55 = $6,875,000. e. none of the above
Premium paid for options = NZ$12.5 million  $.03 = $375,000. ANS: C
Amount of dollars received minus premium = $6,500,000. SOLUTION:
31. If you purchase a straddle on euros, this implies that you: The net profit per unit is: $.87 - $.8- $.04 = $.02.
a. finance the purchase of a call option by selling a put option in the euros. The net profit per unit as a percent of the initial investment per unit is: $.02/$.04 = 50%.
b. finance the purchase of a call option by selling a call option in the euros. 34. You purchase a call option on pounds for a premium of $.03 per unit, with an exercise
c. finance the purchase of a put option by selling a put option in the euros. price of $1.64; the option will not be exercised until the expiration date, if at all. If the spot
d. finance the purchase of a put option by selling a call option in the euros. rate on the expiration date is $1.65, your net profit per unit is:
e. none of the above a. -$.03.
ANS: E b. -$.02.
32. The premium on a pound put option is $.03 per unit. The exercise price is $1.60. The c. -$.01.
break-even point is ____ for the buyer of the put, and ____ for the seller of the put. (As- d. $.02.
sume zero transactions costs and that the buyer and seller of the put option are speculators.) e. none of the above
a. $1.63; $1.63 ANS: B
b. $1.63; $1.60 SOLUTION:
c. $1.63; $1.57 Net profit per unit = $1.65 - $1.64 - $.03 = -$.02.
d. $1.57; $1.63 35. You purchase a put option on Swiss francs for a premium of $.02, with an exercise
e. none of the above price of $.61. The option will not be exercised until the expiration date, if at all. If the spot
ANS: E rate on the expiration date is $.58, your net profit per unit is:
a. -$.03. ANS: E
b. -$.02. SOLUTION:
c. -$.01. Net profit = $.78 + $.03 - $.86 = -$.05.
d. $.02. 38. European currency options can be exercised ____; American currency options can be
e. none of the above exercised ____.
ANS: E a. any time up to the expiration date; any time up to the expiration date
SOLUTION: b. any time up to the expiration date; only on the expiration date
Net profit per unit = $.6- $.58 - $.02 = $.01. c. only on the expiration date; only on the expiration date
36. You are a speculator who sells a call option on Swiss francs for a premium of $.06, d. only on the expiration date; any time up to the expiration date
with an exercise price of $.64. The option will not be exercised until the expiration date, if ANS: D
at all. If the spot rate of the Swiss franc is $.69 on the expiration date, your net profit per 39. Macomb Corporation is a U.S. firm that invoices some of its exports in Japanese yen. If
unit, assuming that you have to buy Swiss francs in the market to fulfill your obligation, is: it expects the yen to weaken, it could ____ to hedge the exchange rate risk on those
a. -$.02. exports.
b. -$.01. a. sell yen put options
c. $.01. b. buy yen call options
d. $.02. c. buy futures contracts on yen
e. none of the above d. sell futures contracts on yen
ANS: C ANS: D
SOLUTION: 40. A call option on Australian dollars has a strike (exercise) price of $.56. The present
Net profit per unit = $.64 + $.06 - $.69 = $.01. exchange rate is $.59. This call option can be referred to as:
37. You are a speculator who sells a put option on Canadian dollars for a premium of $.03 a. in the money.
per unit, with an exercise price of $.86. The option will not be exercised until the expira- b. out of the money.
tion date, if at all. If the spot rate of the Canadian dollar is $.78 on the expiration date, your c. at the money.
net profit per unit is: d. at a discount.
a. -$.08. ANS: A
b. -$.03. 41. A put option on British pounds has a strike (exercise) price of $1.48. The present
c. $.05. exchange rate is $1.55. This put option can be referred to as:
d. $.08. a. in the money.
e. none of the above b. out of the money.
c. at the money. 45. Which of the following would result in a profit of a euro futures contract when the euro
d. at a discount. depreciates?
ANS: B a. buy a euro futures contract; sell a futures contract after the euro has depreciated.
42. Which of the following is not an instrument used by U.S.-based MNCs to cover their b. sell a euro futures contract; buy a futures contract after the euro has depreciated.
foreign currency positions? c. buy a euro futures contract; buy an additional futures contract after the euro has
a. forward contracts. depreciated.
b. futures contracts. d. none of the above would result in a profit when the euro depreciates.
c. non-deliverable forward contracts. ANS: B
d. options. 46. Which of the following is not true regarding options?
e. all of the above are instruments used to cover foreign currency positions. a. Options are traded on exchanges, never over-the-counter.
ANS: E b. Similar to futures contracts, margin requirements are normally imposed on option
43. When the futures price on euros is below the forward rate on euros for the same settle- traders.
ment date, astute investors may attempt to simultaneously ____ euros forward and ____ c. Although commissions for options are fixed per transaction, multiple contracts may be
euro futures. involved in a transaction, thus lowering the commission per contract.
a. sell; sell d. Currency options can be classified as either put or call options.
b. buy; sell e. All of the above are true.
c. sell; buy ANS: A
d. buy; buy 47. A U.S. corporation has purchased currency put options to hedge a 100,000 Canadian
ANS: B dollar (C$) receivable. The premium is $.0and the exercise price of the option is $.75. If the
44. When the futures price is equal to the spot rate of a given currency, and the foreign spot rate at the time of maturity is $.85, what is the net amount received by the corporation
country exhibits a higher interest rate than the U.S. interest rate, astute investors may if it acts rationally?
attempt to simultaneously ____ the foreign currency, invest it in the foreign country, and a. $74,000.
____ futures in the foreign currency. b. $84,000.
a. buy; buy c. $75,000.
b. sell; buy d. $85,000.
c. buy; sell ANS: B
d. buy; buy SOLUTION:
ANS: C
Dollars received from selling Canadian dollars in the spot market = C$100,000  $.85 = $1.5and a premium of $.02. If the spot rate at the option's maturity turns out to be $1.54,
$85,000. Premium paid for options = C$100,000  $.0= $1,000. Amount of dollars what is Carl's profit or loss per unit (assuming the buyer of the option acts rationally)?
received less premium = $84,000. a. -$0.01.
48. A U.S. corporation has purchased currency call options to hedge a 70,000 pound b. $0.01.
payable. The premium is $.02 and the exercise price of the option is $.50. If the spot rate at c. -$0.04.
the time of maturity is $.65, what is the total amount paid by the corporation if it acts d. $0.04.
rationally? e. -$0.03.
a. $33,600. ANS: A
b. $46,900. SOLUTION:
c. $44,100. The net profit per unit is $1.5+ $.02 - $1.54 = - $.01.
d. $36,400. 51. Johnson, Inc., a U.S.-based MNC, will need 10 million Thai baht on August 1. It is now
ANS: D May 1. Johnson has negotiated a non-deliverable forward contract with its bank. The
SOLUTION: reference rate is the baht's closing exchange rate (in $) quoted by Thailand's central bank in
Dollars paid when exercising the option = £70,000  $.50 = $35,000. 90 days. The baht's spot rate today is $.02. If the rate quoted by Thailand's central bank on

Premium paid for options = £70,000  $.02 = $1,400. August is $.022, Johnson will ____ $____.

Amount of dollars paid = $35,000 + $1,400 = $36,400. a. pay; 20,000

49. Frank is an option speculator. He anticipates the Danish kroner to appreciate from its b. be paid; 20,000

current level of $.19 to $.21. Currently, kroner call options are available with an exercise c. pay; 2,000

price of $.18 and a premium of $.02. Should Frank attempt to buy this option? If the future d. be paid; 2,000

spot rate of the Danish kroner is indeed $.21, what is his profit or loss per unit? e. none of the above

a. no; -$0.01. ANS: B

b. yes; $0.01. SOLUTION:

c. yes; -$0.01. Amount received per unit = $.022 - $.02 = $.002  THB10,000,0000 = $20,000.

d. yes; $0.03. 52. If the observed put option premium is less than what is suggested by the put-call parity

ANS: B equation, astute arbitrageurs could make a profit by ____ the put option, ____ the call

SOLUTION: option, and ____ the underlying currency.

The net profit per unit is: $.2 - $.18 - $.02 = $.01. a. selling; buying; buying

50. Carl is an option writer. In anticipation of a depreciation of the British pound from its b. buying; selling; buying

current level of $1.50 to $1.45, he has written a call option with an exercise price of c. selling; buying; selling
d. buying; buying; buying a. discount; 11.11%
ANS: B b. premium; 11.11%
53. A put option premium has a lower bound that is equal to the greater of zero and the c. premium; 10.81%
difference between the underlying ____ prices. The upper bound of a call option premium d. discount; 10.81%
is the ____ price. ANS: D
a. spot and exercise; exercise SOLUTION:
b. spot and exercise; spot Discount = [(FR - SR)/SR]  (360/90) = [($.36 - $.37)/$.37]  (360/90) = - 10.81%
c. exercise and spot; exercise (Discount)
d. exercise and spot; spot 57. Which of the following are most commonly traded on an exchange?
ANS: C a. forward contracts.
54. A call option premium has a lower bound that is equal to the greater of zero and the b. futures contracts.
difference between the underlying ____ prices. The upper bound of a call option premium c. currencies
is the ____ price. d. none of the above
a. spot and exercise; exercise ANS: B
b. spot and exercise; spot 58. Conditional currency options are:
c. exercise and spot; exercise a. options that do not require premiums.
d. exercise and spot; spot b. options where the premiums are canceled if a trigger level is reached.
ANS: B c. options that allow the buyer to decide what currency the option will be settled in.
55. Assume the spot rate of the Swiss franc is $.62 and the one-year forward rate is $.66. d. none of the above
The forward rate exhibits a ____ of ____. ANS: B
a. premium; about 6% 59. Which of the following is true regarding the options markets?
b. discount; about 6% a. Hedgers and speculators both attempt to lower risk.
c. discount; about 6.45% b. Hedgers attempt to lower risk, while speculators attempt to make riskless profits.
d. premium; about 6.45% c. Hedgers and speculators are both necessary in order for the market to be liquid.
ANS: D d. all of the above
SOLUTION: ANS: C
Premium = (Forward rate - Spot rate)/Spot rate = ($.66 - $.62)/$.62 = 6.45% 60. The premium of a currency put option will increase if:
56. Assume the spot rate of a currency is $.37 and the 90-day forward rate is $.36. The a. the volatility of the underlying asset goes up.
forward rate of this currency exhibits a ____ of ____ on an annualized basis. b. the time to maturity goes up.
c. the spot rate declines. a. actual delivery.
d. none of the above b. no transactions costs.
ANS: D c. self regulation.
61. Which of the following is true of options? d. none of the above
a. The writer decides whether the option will be exercised. ANS: D
b. The writer pays the buyer the option premium. 66. Your company expects to receive 5,000,000 Japanese yen 60 days from now. You
c. The buyer decides if the option will be exercised. decide to hedge your position by selling Japanese yen forward. The current spot rate of the
d. More than one of these. yen is $.0089, while the forward rate is $.0095. You expect the spot rate in 60 days to be
ANS: C $.0090. How many dollars will you receive for the 5,000,000 yen 60 days from now?
62. The purchase of a currency put option would be appropriate for which of the following? a. $44,500.
a. Investors who expect to buy a foreign bond in one month. b. $45,000.
b. Corporations who expect to buy foreign currency to finance foreign subsidiaries. c. $526 million.
c. Corporations who expect to collect on a foreign account receivable in one month. d. $47,500.
d. all of the above ANS: D
ANS: B SOLUTION:
63. If you have bought the right to sell, you are a: ¥5,000,000  $.0095/¥ = $47,500
a. call writer. 67. The spot rate for the Singapore dollar is $.588. The 30-day forward rate is $.590. The
b. put buyer. forward rate contains an annualized ____ of ____%.
c. futures buyer. a. discount; -4.07
d. put writer. b. premium; 4.07
ANS: B c. discount; -4.08
d. premium; 4.08
64. If you have a position where you might be obligated to buy Euros, you are: e. premium; 3.40
a. a call writer. ANS: D
b. a put writer. SOLUTION:
c. a put buyer. ($.59 - $.588)/$.588  (360/30) = 4.08%
d. a futures seller. 105. The 180-day forward rate for the euro is $1.34, while the current spot rate of the euro
ANS: C is $1.29. What is the annualized forward premium or discount of the euro?
65. Which of the following is true for futures, but not for forwards? a. 7.46% premium
b. 7.46% discount c. $1.37
c. 7.75% premium d. $1.46
d. 7.75% discount ANS: D
ANS: C SOLUTION:
SOLUTION: $1.49  (1- .02) = $1.46
[(F/S) - 1]  360/180 = [($1.34/$1.29) - 1]  360/180 = 7.75% 109. The spot rate of euro is quoted at $1.29. The annualized forward premium on the euro
106. The annualized forward premium on the euro is 7%. What is the 90-day forward rate is 10%. What is the 30-day forward rate of the euro?
on a. $1.28
the euro if the spot rate today is $1.25? b. $1.30
a. $1.27 c. $1.42
b. $1.34 d. $1.16
c. $1.16 ANS: B
d. $1.23 SOLUTION:
ANS: A $1.29  [1+ 0.10/(360/30)] = $1.30
SOLUTION: 110. The premium on a euro call option is $.02. The exercise price is $1.32. The break-
$1.25  [+ 7%/(360/90)] = $1.27 even point is ____ for the buyer of the call, and ____ for the seller of the call. (Assume
107. The one-year forward rate of the Japanese yen is quoted at $.013, and the spot rate of zero transactions costs and that the buyer and seller of the put option are speculators.)
Japanese yen is quoted at $.011. The forward ____ is ____ percent. a. $1.30; $1.30
a. discount; 18.18 b. $1.34; $1.30
b. premium; 18.18 c. $1.30; $1.34
c. discount; 15.38 d. $1.34; $1.34
d. premium; 15.38 ANS: D
ANS: B SOLUTION:
SOLUTION Break-even point on call option to both the buyer and seller is $1.32 + $.02 = $1.34.
(F/S) -1 = ($.013/$.011) -1 = 18.18% 111. If you have a position where you might be obligated to sell pounds, you are:
108. The spot rate of British pound is quoted at $1.49. The 90-day forward rate exhibits a a. a call writer.
2% discount. What is the 90-day forward rate of the pound? b. a call buyer.
a. $1.52 c. a put writer.
b. $1.6 d. a put buyer.
ANS: A 116. Crown Co. is expecting to receive 100,000 British pounds in one year. Crown expects
112. If you have bought a right to buy foreign currency, you are: the spot rate of British pound to be $1.49 in a year, so it decides to avoid exchange rate risk
a. a call writer. by hedging its receivables. The spot rate of the pound is quoted at $1.51. The strike price of
b. a call buyer. put and call options are $1.54 and $1.53 respectively. The premium on both options is $.03.
c. a put writer. The one-year forward rate exhibits a 2.65% premium. Assume there are no transaction
d. a put buyer. costs. What is the best possible hedging strategy and how many U.S. dollars Crown Co.
ANS: B will receive under this strategy?
113. The premium on a pound put option is $.04. The spot rate and the exercise price is a. buy a put option and receive $150,000.
$1.52. The spot rate at the time of this option expiration is expected to be $1.51. The b. sell pounds forward and receive $155,000.
speculators could profit by: c. sell a call option and receive $156,000.
a. writing a put option. d. sell a put option and receive $157,000.
b. buying a put option. ANS: B
c. buying a call option SOLUTION:
d. writing a call option and buying a call option simultaneously. There are only two feasible choices for hedging in these circumstances: selling pounds
ANS: D forward or buying a put option.
114. A call option on Japanese yen has a strike (exercise) price of $.012. The present Sell pounds forward:
exchange rate is $.011. This call option can be referred to as: One-year forward rate = $1.5  (+ .0265) = $1.55
a. in the money. Dollars received = 100,000  $1.55 = $155,000
b. out of the money. Buy put option:
c. at the money. Amount received per unit = $1.54 - $.03 = $1.51
d. at a discount. Total amount of receivables in U.S.$ = 100,000  $1.51= $151,000
ANS: B 117. J&L Co. is a U.S.-based MNC that frequently exports computers to Italy. J&L
115. A put option on Swiss franc has a strike (exercise) price of $.92. The present exchange typically invoices these goods in euros and is concerned that the euro will depreciate in the
rate is $.89. This put option can be referred to as: near future. Which of the following is not an appropriate technique under these
a. in the money. circumstances?
b. out of the money. a. purchase euro put options.
c. at the money. b. sell euros forward.
d. at a discount. c. sell euro futures contracts.
ANS: A d. sell euro put options.
ANS: D Profit/loss from transaction = (100,000,000  $.0084) - (100,000,000  .009) = $60,000
118. The ____ the existing spot price relative to the strike price, the ____ valuable the call loss.
options will be. 121. Assume that a speculator received news that makes her believe that the yen will
a. higher; less appreciate or depreciate substantially in the near future, but she is not certain of the
b. higher; more direction. Also assume that exercise price of call and put options are the same. The most
c. lower; less appropriate method for speculation is ____and it may be achieved by ____.
d. lower; more a. straddle; purchase put option and purchase call option.
ANS: A b. strangle; purchase put option and sell call option.
119. The ____ the existing spot price relative to the strike price, the ____ valuable the put c. strangle; sell put option and sell put option.
options will be. d. straddle; sell put option and buy call option.
a. higher; less ANS: A
b. higher; more 122. Which of the following does not represent the risk from using forward contracts?
c. lower; less a. if a forward contract is used to hedge receivables, and the spot exchange rate at the
d. lower; more expiration of contract exceeds the contract price.
ANS: D b. if a forward contract is used to hedge receivables, and the spot exchange rate at the time
120. On January 1st, Madison Co. ordered raw material from Japan and agreed to pay 100 of expiration of contract is lower than the contract price.
million yen for this order on April 1st. It negotiated a 3-month forward contract to obtain c. if a forward contract is used to hedge payables, and the spot exchange rate at the time of
100 million Japanese yen on that date at $.009. On February 1st, the Japanese firm expiration of contract is lower than the contract price.
informed Madison Co. that it won't be able to fulfill that order. The Japanese yen spot rate d. if a forward contract is used to hedge payables or receivables and the amount to be
on February 1st is $.0087 and 2-month forward rate exhibits 3% discount. To offset its received or paid is cancelled.
existing contract Madison Co. will negotiate a forward contract to ____ for the date of
April 1st and the profit/loss generated from this transaction is a ____ U.S. dollars. ANS: B
a. sell yen; gain of $60,000 150. A forward rate for a currency is said to exhibit a discount if
b. sell yen; loss of $60,000 a. the forward rate exceeds the existing spot rate.
c. buy yen; gain of $30,000 b. the forward rate is less than the existing spot rate.
d. to buy yen; loss of $30,000 c. the forward rate exceeds the expected future spot rate.
ANS: B d. the forward rate is less than the expected future spot rate.
SOLUTION: e. none of the above
2-month forward rate = $.0087  (1- .03) = $.0084 ANS: B
151. c. 48,000
If the spot rate of the British pound is $1.50, and the one-year forward rate has a discount d. 87,062.50
of 3 percent, the one-year forward rate is $____. ANS: B
a. 1.50 155. Which of the following would result in a profit of a futures contract when the
b. 1.47 underlying
c. 1.55 currency depreciates?
d. 1.46 a. Buy a futures contract; sell a futures contract after the currency has depreciated
e. None of the above b. Sell a futures contract; buy a futures contract after the currency has depreciated
ANS: D c. Buy a futures contract; buy an additional futures contract after the currency has
152. Which of the following is not true regarding futures contracts? depreciated
a. Unlike forward contracts, they are generally traded on an exchange. d. None of the above would result in a profit when the underlying currency of the futures
b. Futures contracts are standardized with respect to delivery date and size of the contract. contract depreciates.
c. There is an active over-the-counter market for currency futures contracts. ANS: B
d. Currency futures can be used by speculators who attempt to profit from exchange rate 156. Currency futures can be used by MNCs to hedge payables. That is, an MNC would
movements. ____ futures to hedge a foreign payable position. Also, currency futures can be used for
ANS: C speculation. For example, a speculator expecting a currency to appreciate would ____
153. When the futures price is above the forward rate, astute investors may attempt to futures.
simultaneously buy a currency forward and sell futures in that currency. These actions a. buy; buy
would place ____ pressure on the forward rate and ____ pressure on the futures rate. b. sell; sell
a. upward; downward c. buy; sell
b. upward; upward d. sell; buy
c. downward; upward ANS: A
d. downward; downward 157. Which of the following is not true regarding options?
ANS: A a. Options are traded on exchanges, never over-the-counter.
154. Assume that the British pound (£) futures price for September is $1.60. Given that b. Similar to futures contracts, margin requirements are normally imposed on option
62,500 units are in a British pound futures contract, the seller of British pound futures will traders.
receive $____ on the delivery date. c. Although commissions for options are fixed per transaction, multiple contracts may be
a. 39,062.50 involved in a transaction, thus lowering the commission per contract.
b. 100,000 d. Currency options can be classified as either put or call options.
e. All of the above are true. are available with an exercise price of $0.88 and a premium of $0.02. If the future spot rate
ANS: A of the Canadian dollar is $0.85, what is Andrea's profit or loss per unit?
158. When the existing spot rate exceeds the exercise price, a call option is ____, and a put a. $0.03
option is ____. b. $0.05
a. out of the money; in the money c. $0.0
b. out of the money; out of the money d. $0.04
c. in the money; in the money ANS: C
d. in the money; out of the money 162. Which of the following is not true regarding options?
ANS: D a. The buyer of a call option has the right to buy the currency at the strike price.
159. When a currency call option is classified as "in the money," this indicates that b. The writer of a call option has the obligation to sell the currency to the buyer if the
a. the spot rate of the currency is less than the exercise price of the option. option if exercised.
b. the spot rate of the currency is greater than the exercise price of the option. c. The buyer of a put option has the right to sell the currency at the strike price.
c. the buyer of the option would generate a profit; that is, the spot rate would exceed the d. The writer of a put option has the obligation to sell the currency to the buyer if the option
sum of the exercise price and the premium paid. is exercised.
d. the buyer of the option would generate a profit; that is, the exercise price would exceed ANS: D
the sum of the spot rate and the premium paid. 163. If the observed put option premium is less than what is suggested by the put-call
ANS: B parity equation, astute arbitrageurs could make a profit by ____ the put option, ____ the
160. A U.S. corporation has purchased currency call options to hedge a 70,000 pound (£) call option, and ____ the underlying currency.
payable. The premium is $0.02 and the exercise price of the option is $0.50. If the spot rate a. selling; buying; buying
at the time of maturity is $0.65, what is the total amount paid by the corporation if it acts b. buying; selling; buying
rationally? c. selling; buying; selling
a. $33,600 d. buying; buying; buying
b. $46,900 ANS: B
c. $44,100
d. $36,400
ANS: D
161. Andrea is an option speculator. She anticipates the Canadian dollar to depreciate from
its current level of $0.90 to $0.85. Currently, Canadian dollar call options are available
with an exercise price of $0.9and a premium of $0.02. Also, Canadian dollar put options