Deck 4: Forward-Looking Market Instruments

Question 1

An American firm has just bought merchandise from a British firm for £50,000 on terms of 90-day payment.This firm has purchased a 3-month call option on 50,000 pounds at a strike price of $1.7 per pound and a premium cost of $0.02 per pound.On the day the option matures,the spot exchange rate is $1.8 per pound.What will be the cost of the option in U.S.dollars?

A) $1000
B) $10
C) $85,000
D) $5,000

Answer 1

$1000

Question 2

The market where commercial banks buy and sell foreign currencies to be delivered at a future date is called the projection currency market.

Answer 2

False

Question 3

The process of matching the liability created by borrowing foreign currencies with the asset created by lending domestic currency by commercial banks is known as ________ the foreign exchange risk.

A) Capitalizing
B) Pegging
C) Drifting
D) Hedging

Answer 3

Hedging

Question 4

One advantage of the forward exchange market is:

A) That no buying/selling of the currency is needed until a specified date in the future.
B) The use of fixed contracts.
C) The initial deposit allows for further leveraging.
D) That contracts deal only in small amounts.

Question 5

An American firm has just bought merchandise from a British firm for £50,000 on terms of 90-day payment.This firm has purchased a 3-month call option on 50,000 pounds at a strike price of $1.7 per pound and a premium cost of $0.02 per pound.On the day the option matures,the spot exchange rate is $1.8 per pound.What will be the value of the pound payable in U.S.dollars,if the U.S.firm exercises the option?

A) $91,000
B) $86,000
C) $85,000
D) $81,000

Question 6

________ refers to buying and selling currencies to be delivered at a future date.

A) The currency swap market
B) The forward market
C) The default swap market
D) The options market

Question 7

In the options market,a ________ gives the right to buy currency and a ________ gives the right to sell.

A) Flat option, put option
B) Put option, flat option
C) Call option, put option
D) Put option, call option

Question 8

Which financial instrument provides a buyer the right but not the obligation to purchase or sell a fixed amount of currency at a prearranged price,within a few days to a couple of years?

A) Futures contract
B) Foreign currency option
C) Currency swap
D) Forward contract

Question 9

Use this information to answer the questions 3-4.
You purchase a futures contract for September delivery September 15^th of 62,500 pounds on March 15^th. The pound futures exchange rate is $1.65 per pound. The bank has a margin requirement of 2 percent.
To secure the futures contract deal with the bank,you will have to put ______ as a deposit with the bank.

A) $1,250
B) $2,000
C) $2062.5
D) $2087.5

Question 10

A strike price is the price where:

A) A futures contract reaches maturity.
B) The owner of an options contract can transact.
C) The bank sets as an out-of-bounds in contract negotiations.
D) All currencies are brought to a standardized price.

Question 11

When the forward price of a currency is equal to the spot price,it is sold at a forward ________.

A) Premium
B) Discount
C) Flat
D) Trade

Question 12

Which of the following is the difference between foreign currency options and futures?

A) Options leave a buyer with the choice of exercising or not exercising; whereas the futures require a mandatory delivery.
B) Options require a mandatory delivery; whereas the futures leave a buyer with the choice of exercising or not exercising.
C) Options require daily cash settlements from contract holders; while the futures do not require any daily cash settlements.
D) Options do not require any daily cash settlements; while the futures require daily cash settlements from contract holders.

Question 13

Which of the following features describe the futures market for foreign exchange?
I.Fixed contracts
II.Tailored size contracts
III.Fixed maturities
IV.Can be resold

A) I only
B) II only
C) I and IV
D) I, II, and IV

Question 14

Which of the following features describe the futures market for foreign exchange?
I.Tailored size contracts
II.Small amount contracts
III.Tailored maturities
IV.Large amount contracts

A) II only
B) IV only
C) I, II, and III
D) I, III, and IV

Question 15

A put option on Japanese yen is written with a strike price of ¥95.00/$.Which spot exchange rate will maximize your profit if you choose to exercise the option?

A) ¥85.00/$
B) ¥90.00/$
C) ¥100.00/$
D) ¥115.00/$

Question 16

If you hold the futures contract until September 15^th and the spot rate for pounds on September 15^th is $1.67 per pound,you will:

A) not exercise the futures contract.
B) lose on your position by $1,250.
C) gain on your position by $1,250.
D) break even by the amount of the margin.

Question 17

Use this information to answer the questions 3-4.
You purchase a futures contract for September delivery September 15^th of 62,500 pounds on March 15^th. The pound futures exchange rate is $1.65 per pound. The bank has a margin requirement of 2 percent.
When the futures contract matures in September the spot rate is $1.67 per pound.How much will you have to pay when the futures contract matures?

A) $103,125
B) $104,375
C) $105,187.5
D) $106,462.5

Question 18

A call option with a strike price less than the current spot price is said to be _____.

A) non-exercisable
B) in-the-money
C) out-of-the-money
D) at-the-money

Question 19

Foreign currency options contracts that give the buyer the right to sell are called:

A) Call options.
B) Selling rights.
C) Put options.
D) Strike rights.

Question 20

Which of the following features describe the forward market for foreign exchange?
I.Tailored size contracts
II.Small amount contracts
III.Tailored maturities
IV.Large amount contracts

A) II only
B) IV only
C) I, II, and III
D) I, III, and IV

Question 21

If the owner of the option exercises the right to buy or sell,the seller of the option must ________.

A) Find a broker for the buyer.
B) Set the strike price and find a new buyer.
C) Calculate the new strike price based upon the days left on the contract.
D) Buy or sell the financial instrument to the buyer.

Question 22

When the forward price of a currency is equal to the spot price,it is sold at a forward premium.

Question 23

Forward premiums and discounts are quoted in annualized form because:

A) The IMF mandates this practice.
B) Unlike options contracts, forward contracts are always one year in length.
C) Purchases are balanced every fiscal year.
D) Comparisons to interest rate returns are easier.

Question 24

Which of the following features describe the forward market for foreign exchange?
I.Fixed contracts
II.Tailored size contracts
III.Fixed maturities
IV.Can be resold

A) I only
B) II only
C) II and IV
D) I, II, and IV

Question 25

Forward-looking market instruments are used to:

A) Reduce traders' exchange rate risk.
B) Manage the flow of imports and exports.
C) Adjust the price of tariffs.
D) Assist central banks in managing floating currencies.

Question 26

Assume that the one-month forward rate is 2.02 dollars per pound and the spot rate is 2.00 dollars per pound.Calculate the annualized percentage forward premium or discount for the pound.

A) 12 percent discount
B) 12 percent premium
C) 144 percent discount
D) 144 percent premium

Question 27

The foreign exchange swap is a combination of spot and forward transactions of the same amount of the currency delivered in two different dates and is ________.

A) Completed when both parties pay a deposit.
B) Adjusted at the midpoint of the contract.
C) No longer used in financial markets.
D) Executed in a single step.

Question 28

In the options market,a put option gives the right to sell and a call option gives the right to buy currency.

Question 29

The forward exchange swap is a process involving the same amount of three currencies.

Question 30

Forward-looking market instruments are used to reduce traders' currency risk.

Question 31

In what market are currency prices sometimes referred to as a strike price?

A) Forward market
B) Swap market
C) Futures market
D) Options market

Question 32

The fixed rate of currencies that will be delivered at an agreed upon future date is called the:

A) Swap price.
B) Future rate.
C) Forward rate.
D) Strike price.

Question 33

A contract that provides the right,but not the obligation,to buy or sell a given amount of currency at a fixed exchange rate on or before the maturity date is called an ______.

A) Excise option
B) Foreign currency option
C) Foreign currency swap
D) Hedge contract

Question 34

The following are benefits of a currency swap except:

A) Swaps avoid dealing with any interest payments.
B) Swaps lower transaction costs of cross-currency cash management.
C) Swaps reduce foreign exchange risk for financing transactions.
D) Swaps allow firms to acquire financing for which it has a comparative advantage.

Question 35

The swap market is available to:

A) Commercial banks.
B) Governments.
C) Multinational firms.
D) Tourists.

Question 36

What financial instruments allow firms to obtain long-term foreign currency financing at lower cost than they can by borrowing directly?

A) Currency swaps
B) Forward rates
C) Foreign currency options
D) Future contracts

Question 37

Assume that the annualized forward premium is 1 percent and that the spot rate is 2.00 $/pound.What would the one-year forward rate have to be?

A) 1.76
B) 1.98
C) 2.02
D) 2.24

Question 38

Currency is sold at a forward discount when the spot price of a currency is less than the forward price.

Question 39

When the forward price of a currency ________ the spot price,the currency is said to sell at a ________.

A) Greater than, flat
B) Greater than, discount
C) Less than, discount
D) Less than, premium

Question 40

Foreign currency options contracts that give the buyer the right to buy are called:

A) Call options.
B) Purchase rights.
C) Put options.
D) Strike rights.

Question 41

An option contract requires an up-front premium payment.

Question 42

A foreign currency option gives the purchaser the right to buy or sell a given amount of currency only after the maturity date.

Question 43

Standardized contracts traded on established exchanges for delivery of currencies at a specified future date are called foreign currency futures.

Question 44

The exchange market has seen the rise of new contracts combines features of forward contracts and option contracts.