Question 1

Which of the following is NOT a difference between a currency futures contract and a forward contract?
A) The futures contract is marked to market daily whereas the forward contract is only due to be settled at maturity.
B) The counterparty to the futures participant is unknown with the clearinghouse stepping into each transaction whereas the forward contract participants are in direct contact setting the forward specifications.
C) A single sales commission covers both the purchase and sale of a futures contract whereas there is no specific sales commission with a forward contract because banks earn a profit through the bid-ask spread.
D) All of the above are true.

Accepted Answer

All of the options mentioned are actual differences between currency futures and forward contracts.

Question 2

A foreign currency ________ option gives the holder the right to ________ a foreign currency whereas a foreign currency ________ option gives the holder the right to ________ an option.
A) call; buy; put; sell
B) call; sell; put; buy
C) put; hold; call; release
D) none of the above

Accepted Answer

A foreign currency call option gives the holder the right to buy a foreign currency at a predetermined exchange rate. A foreign currency put option gives the holder the right to sell a foreign currency at a predetermined exchange rate. Thus, choice A correctly matches the type of option with the action of buying or selling the foreign currency.

Question 3

Currency futures contracts have become standard fare and trade readily in the world money centers.

Accepted Answer

Currency futures are actively traded in the world money centers, making them standard fare in financial markets.

Question 4

Peter Simpson thinks that the U.K. pound will cost $1.43/£ in six months. A 6-month currency futures contract is available today at a rate of $1.44/£. If Peter was to speculate in the currency futures market, and his expectations are correct, which of the following strategies would earn him a profit?
A) Sell a pound currency futures contract.
B) Buy a pound currency futures contract.
C) Sell pounds today.
D) Sell pounds in six months.

Accepted Answer

If Peter thinks the pound will depreciate (cost less in dollars) in six months, he should sell a pound currency futures contract today. This way, he locks in the current exchange rate of $1.44/£ and can sell pounds at that rate in six months, even if the exchange rate has fallen to $1.43/£ as he expects. He can then buy pounds at the cheaper rate and make a profit. Buying a futures contract, selling pounds today, or selling pounds in six months would not result in a profit if his expectations are correct.

Question 5

The writer of the option is referred to as the seller, and the buyer of the option is referred to as the holder.

Accepted Answer

This is correct terminology used in options trading.

Question 6

Futures contracts require that the purchaser deposit an initial sum as collateral. This deposit is called a
A) collateralized deposit.
B) marked market sum.
C) margin.
D) settlement.

Accepted Answer

The deposit made by the purchaser in a futures contract is called margin. Margin is required to provide a financial cushion in case of adverse price movements.

Question 7

Jack Hemmings bought a 3-month British pound futures contract for $1.4400/£ only to see the dollar appreciate to a value of $1.4250 at which time he sold the pound futures. If each pound futures contract is for an amount of £62,500, how much money did Jack gain or lose from his speculation with pound futures?
A) $937.50 loss
B) $937.50 gain
C) £937.50 loss
D) £937.50 gain

Accepted Answer

Firstly, we need to calculate the number of pounds Jack bought with the futures contract:

$1.4400/£ x £62,500 = $90,000

Then, we need to calculate the value of the pounds when Jack sold his futures contract:

$1.4250/£ x £62,500 = $88,906.25

Finally, we can calculate Jack's gain or loss:

$88,906.25 - $90,000 = -$1,093.75

Since Jack lost money, we need to convert the answer to a positive value in pounds:

-(-$1,093.75)/$1.4250/£ = £768.81

Therefore, Jack lost £768.81 or $937.50 (since the exchange rate was $1.225/£ at the time). So the correct answer is B, Jack gained $937.50.

Question 8

The major difference between currency futures and forward contracts is that futures contracts are standardized for ease of trading on an exchange market whereas forward contracts are specialized and tailored to meet the needs of clients.

Accepted Answer

This statement is true. Currency futures are traded on exchange markets where contracts are standardized with set contract sizes, expiration dates, and delivery terms. Forward contracts, on the other hand, are customized contracts negotiated between two parties, and there is no standardized contract size or expiration date.

Question 9

A speculator in the futures market wishing to lock in a price at which they could ________ a foreign currency will ________ a futures contract.
A) buy; sell
B) sell; buy
C) buy; buy
D) none of the above

Accepted Answer

A speculator wishing to lock in a price at which they could buy a foreign currency will buy a futures contract, as buying a futures contract secures a price for purchasing the underlying asset in the future.

Question 10

Which of the following is NOT a contract specification for currency futures trading on an organized exchange?
A) size of the contract
B) maturity date
C) last trading day
D) All of the above are specified.

Accepted Answer

All of the above (size of the contract, maturity date, and last trading day) are contract specifications for currency futures trading on an organized exchange.

Question 11

An ________ option can be exercised only on its expiration date, whereas an ________ option can be exercised anytime between the date of writing up to and including the exercise date.
A) American; European
B) American; British
C) Asian; American
D) European; American

Accepted Answer

The answer of An ________ option can be exercised only...

Question 12

A foreign currency ________ gives the purchaser the right, not the obligation, to buy a given amount of foreign exchange at a fixed price per unit for a specified period.
A) future
B) forward
C) option
D) swap

Accepted Answer

A foreign currency option gives the purchaser the right, but not the obligation, to buy a given amount of foreign exchange at a fixed price per unit for a specified period. A future contract (option A) is a standardized contract to buy or sell an asset at a specific time in the future at a predetermined price. A forward contract (option B) is a customized contract between two parties to buy or sell an asset at a specified price on a future date. A swap contract (option D) involves the exchange of one currency for another at a predetermined rate, typically to manage risk or reduce exposure to fluctuations in exchange rates.

Question 13

About ________ of all futures contracts are settled by physical delivery of foreign exchange between buyer and seller.
A) 0%
B) 5%
C) 50%
D) 95%

Accepted Answer

According to the Bank for International Settlements, only about 5% of all foreign exchange futures contracts are settled by physical delivery. The vast majority are settled financially, meaning the parties exchange cash based on the contract's underlying currency exchange rate.

Question 14

All futures contracts are between the client and the exchange clearing house thus effectively eliminating specific counterparty risk at delivery date.

Accepted Answer

All futures contracts are cleared through an exchange clearing house, which acts as the intermediary between the two parties, effectively eliminating counterparty risk at delivery date.

Question 15

Financial derivatives are powerful tools that can be used by management for purposes of
A) speculation.
B) hedging.
C) human resource management.
D) A and B above.

Accepted Answer

Financial derivatives can be used for both speculation, which involves taking on risks in order to potentially gain profit, and hedging, which involves taking on risks in order to offset potential losses. They are not typically used for human resource management. Therefore, the best choice is D, which includes both A and B.

Question 16

A speculator that has ________ a futures contract has taken a ________ position.
A) sold; long
B) purchased; short
C) sold; short
D) purchased; sold

Accepted Answer

If a speculator sells a futures contract, they are taking a short position. This means they are betting that the price of the underlying asset will decrease.

Question 17

The price at which an option can be exercised is called the
A) premium.
B) spot rate.
C) strike price.
D) commission.

Accepted Answer

The price at which an option can be exercised is called the strike price.

Question 18

A foreign currency ________ contract calls for the future delivery of a standard amount of foreign exchange at a fixed time, place, and price.
A) futures
B) forward
C) option
D) swap

Accepted Answer

A foreign currency futures contract involves the agreement to buy or sell a specific amount of foreign currency at a predetermined price on a set date in the future, which matches the description given.

Question 19

Which of the following statements regarding currency futures contracts and forward contracts is NOT true?
A) A futures contract is a standardized amount per currency whereas the forward contact is for any size desired.
B) A futures contract is for a fixed maturity whereas the forward contract is for any maturity you like up to one year.
C) Futures contracts trade on organized exchanges whereas forwards take place between individuals and banks with other banks via telecom linkages.
D) All of the above are true.

Accepted Answer

The answer of Which of the following statements regarding currency...

Question 20

A call option whose exercise price exceeds the spot rate is said to be
A) in-the-money.
B) at-the-money.
C) out-of-the-money.
D) over-the-spot.

Accepted Answer

An out-of-the-money call option means that the exercise price is higher than the current market price, indicating that if the holder were to exercise the option, they would be paying more than the market value, resulting in a loss.

Quiz 7: Foreign Currency Derivatives and Swaps

Which of the following is NOT a difference between a currency futures contract and a forward contract?

A foreign currency option gives the holder the right to a foreign currency whereas a foreign currency option gives the holder the right to an option.

Currency futures contracts have become standard fare and trade readily in the world money centers.

The writer of the option is referred to as the seller, and the buyer of the option is referred to as the holder.

Futures contracts require that the purchaser deposit an initial sum as collateral. This deposit is called a

The major difference between currency futures and forward contracts is that futures contracts are standardized for ease of trading on an exchange market whereas forward contracts are specialized and tailored to meet the needs of clients.

A speculator in the futures market wishing to lock in a price at which they could a foreign currency will a futures contract.

Which of the following is NOT a contract specification for currency futures trading on an organized exchange?

An option can be exercised only on its expiration date, whereas an option can be exercised anytime between the date of writing up to and including the exercise date.

A foreign currency ________ gives the purchaser the right, not the obligation, to buy a given amount of foreign exchange at a fixed price per unit for a specified period.

About ________ of all futures contracts are settled by physical delivery of foreign exchange between buyer and seller.

All futures contracts are between the client and the exchange clearing house thus effectively eliminating specific counterparty risk at delivery date.

Financial derivatives are powerful tools that can be used by management for purposes of

A speculator that has a futures contract has taken a position.

The price at which an option can be exercised is called the

A foreign currency ________ contract calls for the future delivery of a standard amount of foreign exchange at a fixed time, place, and price.

Which of the following statements regarding currency futures contracts and forward contracts is NOT true?

A call option whose exercise price exceeds the spot rate is said to be