Deck 3: Currency and Eurocurrency Derivatives

Question 1

The underlying asset in a currency forward contract is:

A)units of the currency selected by a counterparty at a future date.
B)units of the term currency.
C)units of the base currency.
D)any asset specified by the long counterparty at a future date.

Answer 1

units of the base currency.

Question 2

If the underlying asset in a forward cannot actually be delivered on maturity,a derivative in the form of a(n)___________________________ can still be used.

A)illusory forward
B)mimic derivative
C)nondeliverable forward
D)restricted derivative

Answer 2

nondeliverable forward

Question 3

Currency forwards,also known as ____________,are traded in the:

A)swap forwards;over-the-counter markets.
B)currency swaps;Interbank market.
C)credit default swaps;over-the-counter markets.
D)outright forwards;Interbank market.

Answer 3

outright forwards;Interbank market.

Question 4

Currency derivatives were created:

A)to provide speculative investment opportunities for individuals.
B)by Interbanks seeking to expand the investment opportunities that they offered.
C)because MNCs often require foreign currencies and seek ways to limit their exposure to currency value fluctuations.
D)so that governments could control the value of their currencies.

Question 5

The exchange rate that is specified in a currency forward contract is called the:

A)strike price.
B)contract exchange rate.
C)prevailing exchange rate.
D)forward price.

Question 6

In a ____________________________,counterparty A pays interest to counterparty B at a fixed rate and in a designated currency and counterparty B pays interest to counterparty A at a fixed rate and in a different designated currency.

A)currency swap
B)forward contract
C)cross-currency swap
D)interest rate swap

Question 7

The online trading systems used in the currency markets:

A)allow for faster and less costly trading.
B)are unregulated and,therefore,risky.
C)allow individual investors to be the major traders in currency forwards.
D)are still being constructed and will not be available for several years.

Question 8

The typical counterparties in a derivative contract are the:

A)the spot seller and the forward buyer.
B)the offeror and the offeree.
C)the long (buyer)and the short (seller).
D)the put option and the call option.

Question 9

Most derivatives that are traded are trade in:

A)special divisions of established stock markets.
B)curb markets.
C)over-the-counter (OTC)or wholesale markets.
D)exchange or retail markets.

Question 10

If a long agrees to buy a specified asset from a short at a specified future date for a specified price,the result is a(n):

A)unenforceable contract.
B)forward contract.
C)option contract.
D)futures contract.

Question 11

The price at which a long can exercise a right to buy a specified asset from a short at a specified future date is the:

A)contract price.
B)forward price.
C)settled price.
D)strike price.

Question 12

Currency derivatives are:

A)an important category of derivatives and are the most prevalent type of derivative.
B)very complicated and are not used very often in international finance.
C)an important category of derivatives but are not the most prevalent type of derivative.
D)not used in international financial transactions.

Question 13

In calculating forward pricing,the underlying asset,currency,is called the ________________ and is represented in calculations as:

A)target asset;T.
B)the real asset;r.
C)spot asset;S.
D)the nondeliverable asset;n.

Question 14

__________________________ comprise the great majority of derivatives used.

A)Currency derivatives
B)Interest rate derivatives
C)Stock purchase derivatives
D)Currency swap derivatives

Question 15

The nominal value of a forward contract to purchase 5 million United States dollars (USD)is:

A)5 million USD.
B)5.1 million USD.
C)2 million MXP.
D)the nominal value cannot be determined until a future date.

Question 16

Call options are similar to forwards because they represent ___________ by the long,but they are different from forwards because they offer the long ______________________.

A)a preplanned future purchase;the flexibility to opt out of the purchase
B)a preplanned future purchase;the flexibility to buy more of the asset than originally planned
C)an opportunity for profit;an opportunity to avoid a loss
D)an opportunity to profit;no opportunity to avoid a loss

Question 17

Derivative contracts that can be traded after they are made are:

A)illegal.
B)not valuable.
C)forward contracts.
D)financial instruments.

Question 18

Put options allow the long the opportunity but not the obligation to:

A)buy the underlying asset at a predetermined price.
B)buy or sell the underlying asset at a predetermined price.
C)sell the underlying asset at a predetermined price.
D)to force the short to sell the underlying asset at a predetermined price.

Question 19

Why would a rise in interest rates adversely affect MNCs that produce durable goods?

A)A rise in interest rates increases the cost that consumers of those durable goods have to pay and,therefore,reduces the demand for those durable goods.
B)A rise in interest rates causes the value of the domestic currency to decrease,making the cost of the durable goods worldwide more expensive.
C)A rise in interest rates indicates economic disruption in the country and makes it more difficult for MNCs to sell their products worldwide.
D)A rise in interest rates signals the MNCs inability to continue to produce at the level it has been producing,and lower product means lower profits.

Question 20

If counterparties agree that one currency can be exchanged for another currency at a specified future date at a specified exchange rate,a _________________ contract is formed.

A)currency forward
B)currency swap
C)cross-currency swap
D)spot currency

Question 21

If a long counterparty has the right but not the obligation to buy the underlying asset at a future date at a strike price,the contract is called a(n):

A)forward.
B)option.
C)future.
D)agreement for purchase.

Question 22

Differences between future prices on one market and forward prices on another market:

A)do not happen because of the degree of control that the markets exercise over prices.
B)are allowed to continue to encourage speculation.
C)give individual investors opportunities to make large profits.
D)offer opportunities to profit by buying at the lower price and selling at the higher price.

Question 23

From a cash flow standpoint,the difference between forwards and futures is that:

A)forwards require the payment of the purchase price at the time the forward is obtained,but futures are paid for only at maturity.
B)forwards cost more than futures.
C)futures are sold in larger denominations than forwards.
D)futures are settled every day,but forwards are settled only at maturity.

Question 24

The counterparty risk in forward contracts:

A)means that most MNCs do not participate in the forward markets.
B)restricts forward market participants to large firms with good credit ratings.
C)dictates that only financial institutions can participate in the forward markets.
D)the forward markets are very small and facilitate only very small transactions.

Question 25

Futures are traded anonymously on markets,so markets regularly require trading parties to establish:

A)margin accounts.
B)insurance policies.
C)collateral accounts.
D)futures accounts.

Question 26

Forwards are traded in the Interbank market and forwards are traded in the CME and other markets,so currency markets are:

A)among the few where both forwards and futures are traded.
B)able to treat forwards and futures as a single derivative.
C)difficult to understand because they sell two different derivatives using the same pricing structure.
D)able to control the prices of both forwards and futures.

Question 27

Real options can be described as:

A)similar to financial options but without the involvement of cash or currency.
B)options whose value is determined without reference to the inflation rate.
C)options that have actually been exercised.
D)business opportunities for firms to acquire assets that will increase their cash flow.

Question 28

Financial instruments that allow the holder to elect to buy (or sell)underlying assets in the future are called:

A)real options.
B)financial options.
C)call options.
D)put options.

Question 29

If a party has the right but not the obligation to buy the underlying asset,the party has a(n)_____________________;if the party has right but not an obligation to sell the underlying asset,the party has a:

A)call option;put option.
B)put option;call option.
C)buy option;sell option.
D)option;future.

Question 30

Options,forwards and futures all have in common that:

A)all have a value that is easily determined.
B)each allows an entity to arrange for the future purchase or sale of an underlying asset at a predetermined price.
C)all are trade in the Interbank market.
D)each allows an entity to make an agreement and then get out of that agreement if carrying through with the agreement will result in a loss.

Question 31

If the forward price in a currency forward is lower than the spot price of the base currency,the currency forward is said to contain a(n):

A)error.
B)bonus.
C)forward premium.
D)forward discount.

Question 32

The best way to deal with counterparty risk is to:

A)make sure that the counterparties are good credit risks.
B)deal only with firms that have been dealt with in previous transactions.
C)avoid it.
D)require counterparties to post collateral to ensure the performance of their obligations.

Question 33

A forward contract that is standardized and that is traded on an exchange is called a(n):

A)future.
B)exchange forward.
C)traded forward.
D)option.

Question 34

In terms of options,____________________ is (are)the commodities,instruments,or currency that can be bought or sold by exercising the option.

A)underlying assets
B)option object
C)collateral
D)corpus

Question 35

A call option gives the long party the right to buy the underlying asset at a predetermined price,so:

A)the price of the underlying asset and the call price are positively related.
B)the price of the underlying asset and the call price are negatively related.
C)the long party will not exercise the option unless the call price is more than the price of the underlying asset at the maturity date of the option.
D)the long party will have to exercise the option no matter the price of the underlying asset at the maturity date of the option.

Question 36

The Chicago Mercantile Exchange is the market leader in currency futures and provides a place to trade currency futures and:

A)services such as investment advice,asset valuation,and loaning money to purchase currency futures.
B)a depository for the assets underlying derivatives.
C)services such as clearing trades,processing settlements,and keeping track of collateral posted by counterparties.
D)secrecy for the details of currency forwards transactions.

Question 37

If a long counterparty has the right but not the option to buy the underlying asset but that right can only be exercised at the maturity date of the agreement,the agreement is a(n):

A)American-style option.
B)maturity option.
C)European-style option.
D)delayed option.

Question 38

Options are more useful than forwards and futures because options:

A)are traded in more markets.
B)are obtained at a lower cost than forwards and futures.
C)allow a party to elect not to go through with a transaction that will cause the party a loss.
D)are easier to value than forwards and futures.

Question 39

A request to deposit additional funds in a margin account is a:

A)margin call.
B)deposit advice.
C)required deposit.
D)margin hold.

Question 40

Margin accounts are required to maintain a minimum balance which is usually lower than the initial margin balance,called a:

A)continuing balance.
B)maintenance margin.
C)futures balance.
D)call balance.

Question 41

When an option is exercised,the party exercising the option has a profit equal to:

A)the cash flow resulting from the exercise of the option.
B)the cash flow resulting from the exercise of the option less the premium paid for the option.
C)the premium originally paid for the option.
D)the cash flow resulting from the exercise of the option plus any savings resulting from changes in exchange rates.

Question 42

How are forward contracts used in international financial transactions?

Question 43

The predetermined amount that will have to be paid if an option is exercised is the:

A)contract price.
B)option price.
C)strike price.
D)actual price.

Question 44

An MNC faced with the need for a certain amount of foreign currency at a specific date in the future has two choices in guaranteeing the cost of acquiring that foreign currency: it can simply buy the needed currency now and hold that currency until it is needed at the future date,or it can buy a forward contract for the currency and guarantee the exchange rate that it will use to acquire the currency at the future date.What are the primary differences in these approaches:

Question 45

What do the sellers of options do to earn the option premium?

Question 46

The majority of options used in international transactions expire:

A)in 30 days.
B)when the exchange rate changes.
C)in 90 days.
D)in six months.

Question 47

The option premium paid by the long counterparty to the short counterparty as compensation for the risk that the short counterparty is assuming as a result of the option is also known as the:

A)long premium.
B)short profit.
C)premium value.
D)option value.

Question 48

What are derivatives and what role do they play in international financial transactions?

Question 49

How are credit default swaps used in international financial transactions?

Question 50

The seller of an option will always __________ when the option is exercised,so:

A)lose;the buyer of an option pays a premium to the seller of the option as compensation for the risk of loss that the option seller takes.
B)lose;the seller of an option will also have an option to get out of the option contract.
C)profit;the cost of options is very low.
D)profit;the seller of the option will agree to share the profit with the buyer of the option.