Deck 20: Foreign Currency Futures and Options

Question 1

Which one of the following is an example of a currency futures exchange?

A) The Chicago Board of Trade
B) The New York Stock Exchange
C) The International Monetary Market
D) The Tokyo Stock Exchange

Answer 1

C

Question 2

The exchange rate in an option contract is called the option's ________.

A) premium
B) discount
C) strike price
D) delivery price

Answer 2

C

Question 3

Unlike forward contracts,the size of currency futures contracts are ________.

A) subject to the forces of supply and demand in the currency spot market
B) based on the months in which they expire
C) a function of the initial margin required at the open of the trade
D) a standardized amount that differs for each currency traded

Answer 3

D

Question 4

The ________ is the primary location in the United States to trade currency options.

A) Philadelphia Stock Exchange
B) Chicago Board of Trade
C) Chicago Mercantile Exchange
D) New York Stock Exchange

Question 5

What is the name of the total number of contracts outstanding for a particular derivative contract?

A) a long position
B) open interest
C) settle amount
D) open settlement

Question 6

The last traded futures price in which case appointed traders in the pit establish the value of the futures price by consensus is know as the

A) settle price.
B) maintenance margin.
C) open interest.
D) initial margin.

Question 7

When the value of the futures contract margin account falls below the maintenance margin,________.

A) no action is necessary by the investor
B) there is a margin call
C) there is a margin call at which point the account must be brought back up to the maintenance margin amount
D) no money changes hands again until the expiration date

Question 8

The hedging contract that gives the buyer the right,but not the obligation,to sell a specific amount of foreign currency with domestic currency is known as the ________.

A) call option
B) put option
C) American option
D) European option

Question 9

The ________ is the minimum amount that must be kept in the futures margin account to guard against severe volatility in the futures contract price.

A) initial margin
B) settle price
C) maintenance margin
D) open interest

Question 10

A major difference between foreign currency futures contracts and forward contracts is that forward contracts are ________.

A) sold by government agencies
B) created by banks
C) created by writers
D) marketed on the over-the-counter market

Question 11

The original or first seller of the option is known as the ________.

A) option broker
B) writer
C) option commission merchant
D) clearing member

Question 12

________ is a daily settlement feature of the currency futures exchange in which profits and losses are paid over every day at the end of trading.

A) Open interest
B) A margin call
C) Marking to market
D) A maintenance margin

Question 13

What is the term for the revenue immediately generated from exercising a currency option?

A) open interest
B) leading payment
C) margin
D) intrinsic value

Question 14

Marking to market is the process by which the clearing house of an exchange ________.

A) debits and credits the losses and profits to the margin accounts from the daily price changes of futures prices; closes the contract, and opens a new one at the new price
B) forces the investor to go long the currency
C) allows the market forces to affect daily prices until the expiration date
D) closes the old contract and sets the price of a new contract a zero

Question 15

The hedging contract that gives the buyer the right,but not the obligation,to buy a specific amount of foreign currency with domestic currency is known as the ________.

A) call option
B) put option
C) American option
D) European option

Question 16

Unlike forward contracts,the maturity dates in the futures market are ________.

A) limited to four dates during the year
B) based on the first business day of each month
C) unlimited since futures contracts may be terminated anytime
D) limited to only regular business days rather than calendar days

Question 17

An option that can be exercised only at maturity is known as a(n)________.

A) American option
B) European option
C) currency warrant
D) call option

Question 18

When a futures contract is purchased,________.

A) no money changes hands
B) the only cash flow is at the maturity of the contract
C) the buyer must deposit a certain amount of cash into a margin account
D) the futures commission merchant marks up the price to cover his commission

Question 19

The difference between the current spot price and the futures price is known as the

A) spread.
B) barrier.
C) basis.
D) open interest.

Question 20

Due to arbitrage,the futures price at maturity ________.

A) is driven to equality with the spot rate on that date
B) remains the same as the price of the opening trade for the date
C) represents the last trading price
D) represents the average price of the open interest outstanding

Question 21

What are the differences between foreign currency option contracts and forward contracts for foreign currency?

Question 22

Why do options provide insurance against foreign exchange risks in bidding situations? Why can't you hedge with a forward contract in a bidding situation?

Question 23

Which of the following conditions would be "in the money" for an American call option for foreign currency?

A) when the market price limits are reached and trading is halted
B) when the strike price is greater than the spot price
C) when the strike price is equal to the spot price
D) when the strike price is lower than the spot price

Question 24

What are you buying if you purchase a U.S.dollar European put option against the Mexican peso with a strike price of MXN10.0/$ and a maturity of July? (Assume that it is May and the spot rate is MXN10.5/$.)

Question 25

What does it mean for an American option to be "in the money"?

Question 26

Suppose that you have a foreign currency receivable (payable).What option strategy places a floor (ceiling)on your domestic currency revenue (cost)?

Question 27

Why is a currency put or call not profitable to exercise when it is "at the money"?

A) because the spot equals the price but the premium is not recovered if it is exercised resulting in a loss
B) When an option is "at the money," the Exchange will charge a higher fee.
C) When it is "at the money," the Exchange shuts down trading of the option contract.
D) The Exchange will use mark to market accounting to record a loss.

Question 28

Suppose the current spot rate for the pound is $01.7427.A put option with an exercise price of $01.7550 is said to be

A) in-the-money.
B) out-of-the-money.
C) at-the-money.
D) past breakeven.

Question 29

Which one of the following practices in the futures markets adds greater stability to the market?

A) credit checks
B) the initial margin
C) marking to market
D) the right but not the requirement to perform the contract

Question 30

Which one of the following is an advantage to the investor of a currency futures contract as compared to a forward contract?

A) more flexibility in contract size
B) more liquidity when the investor wishes to sell the contract
C) more currencies available
D) more payment dates

Question 31

Suppose that XYZ International Company has purchased a Swiss francs futures contract (contact size is SFr 125,000)at a price of $0.8250 at $0.83.If the spot rate for the Swiss franc at the date of settlement is SFr = $0.8250,what is the Company's gain or loss on the contract?

Question 32

What effects does "marking to market" have on futures contracts?