Question 1

Your company expects to receive 5,000,000 Japanese yen 60 days from now.You decide to hedge your position by selling Japanese yen forward.The current spot rate of the yen is $.0089,while the forward rate is $.0095.You expect the spot rate in 60 days to be $.0090.How many dollars will you receive for the 5,000,000 yen 60 days from now
A) $44,500.
B) $45,000.
C) $526 million.
D) $47,500.

Accepted Answer

To hedge the position, we need to sell Japanese yen forward.

Using the information given, the current spot rate of the yen is $.0089, while the forward rate is $.0095.

Thus, the forward exchange rate is at a premium (i.e., the yen is expected to appreciate).

If we sell Japanese yen forward, we can lock in the exchange rate at the forward rate of $.0095.

Therefore, we will receive:

5,000,000 yen x $.0095/yen = $47,500

in 60 days.

Question 2

Both call and put option premiums are affected by the level of the existing spot price relative to the strike price;for example,a high spot price relative to the strike price will result in a relatively high premium for a call option but a relatively low premium for a put option.

Accepted Answer

This statement is true. A call option gives the holder the right to buy an underlying asset at a specified strike price, so a high spot price relative to the strike price will result in a higher chance that the option will be exercised, leading to a higher premium. On the other hand, a put option gives the holder the right to sell an underlying asset at a specified strike price, so a high spot price relative to the strike price will decrease the probability of exercising the option, leading to a lower premium.

Question 3

If you have a position where you might be obligated to buy Euros,you are:
A) a call writer.
B) a put writer.
C) a put buyer.
D) a futures seller.

Accepted Answer

The answer of If you have a position where you...

Question 4

Which of the following is true for futures,but not for forwards
A) actual delivery.
B) no transactions costs.
C) self regulation.
D) none of the above

Accepted Answer

The answer of Which of the following is true for...

Question 5

The price of a futures contract will generally vary significantly from that of a forward contract.

Accepted Answer

Futures and forward contracts are both derivatives used for the purpose of hedging and speculation, and their prices are typically very similar because they are both based on the same underlying assets. The main differences between them are related to standardization, trading venues, and credit risk, not the pricing mechanism itself.

Question 6

Which of the following is true of options
A) The writer decides whether the option will be exercised.
B) The writer pays the buyer the option premium.
C) The buyer decides if the option will be exercised.
D) More than one of these.

Accepted Answer

The buyer of an option has the right to decide whether to exercise the option or not. The writer of the option has the obligation to sell or buy the underlying asset if the option is exercised, but they don't decide whether the option is exercised or not. Additionally, the buyer pays the option premium to the writer, not the other way around. Therefore, options are a type of contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a set price within a specified time period.

Question 7

If the futures rate is lower than the forward rate,astute investors would attempt to simultaneously buy futures and sell forward.Such actions would place downward pressure on the futures price and upward pressure on the forward rate.

Accepted Answer

If the futures rate is lower than the forward rate, it would actually be more profitable for investors to sell futures and buy forward, not the other way around. This would put upward pressure on the futures price and downward pressure on the forward rate.

Question 8

If you have bought the right to sell,you are a:
A) call writer.
B) put buyer.
C) futures buyer.
D) put writer.

Accepted Answer

When you buy the right to sell an asset, it means you have purchased a put option, making you a put buyer. This gives you the right, but not the obligation, to sell the underlying asset at a specified price within a certain period.

Question 9

Due to put-call parity,we can use the same formula to price calls and puts.

Accepted Answer

Put-call parity establishes a relationship between the prices of European call and put options with the same strike price and expiration date, but it does not imply that the same pricing formula is used for both. Pricing models, such as the Black-Scholes model, are adapted differently for calls and puts.

Question 10

The writer of a call option is obligated to sell the underlying currency to the buyer of the option if the option is exercised.

Accepted Answer

This is correct. When a call option is exercised, the writer (seller) of the option has the obligation to sell the underlying currency at the predetermined strike price to the buyer of the option.

Question 11

The lower bound of a put option premium is the greater of zero and the difference between the exercise price and the spot rate;the upper bound of a currency put option is the exercise price.

Accepted Answer

This is correct according to the put-call parity formula, which states that the lower bound of a put option premium is max(0, X-S), where X is the exercise price and S is the spot rate. The upper bound of a currency put option is unlimited, as the spot rate can potentially decrease infinitely, but it is typically equal to the exercise price.

Question 12

If an actual put option premium is less than what is suggested by the put-call parity relationship,arbitrage can be conducted.

Accepted Answer

Put-call parity establishes a relationship between the prices of call and put options with the same strike price and expiration date. If the actual premium of a put option is lower than what is suggested by put-call parity, it means that the put option is undervalued and can be bought at a lower price than expected. This presents a profit opportunity for arbitrageurs, who can buy the put option, sell a call option at the same strike price and expiration date, and invest the proceeds in risk-free securities. By doing so, the arbitrageur locks in a risk-free profit equal to the difference between the actual put premium and the put premium implied by put-call parity.

Question 13

Forward contracts are usually liquidated by actual delivery of the currency,while futures contracts are usually liquidated by offsetting transactions.

Accepted Answer

This statement is true. In forward contracts, the party that is obligated to buy or sell the currency is required to make actual delivery of the currency upon the expiration of the contract. In contrast, futures contracts allow for offsetting transactions to be made prior to the expiration of the contract, meaning that the currency does not need to be physically delivered.

Question 14

The lower bound of the call option premium is the greater of zero and the difference between the spot rate and the exercise price;the upper bound of a currency call option is the spot rate.

Accepted Answer

This statement is correct. The lower bound of a call option premium is calculated by taking the maximum of zero and the difference between the spot rate and the exercise price. The upper bound of a currency call option is the spot rate because the option holder would not pay more for the option than the actual spot rate.

Question 15

Since futures contracts are traded on an exchange,the exchange will always take the "other side" of the transaction in terms of accepting the credit risk.

Accepted Answer

The answer of Since futures contracts are traded on an...

Question 16

The purchase of a currency put option would be appropriate for which of the following
A) Investors who expect to buy a foreign bond in one month.
B) Corporations who expect to buy foreign currency to finance foreign subsidiaries.
C) Corporations who expect to collect on a foreign account receivable in one month.
D) all of the above

Accepted Answer

A currency put option gives the holder the right to sell a specified amount of currency at a predetermined strike price, which can protect against potential losses from a decline in the currency's value. Therefore, corporations who expect to buy foreign currency to finance their foreign subsidiaries may benefit from purchasing a currency put option. Option A is not appropriate, as the investor is not holding the foreign currency and is not exposed to currency risk. Option C is also not appropriate, as the corporation is not holding the foreign currency and is not exposed to currency risk either.

Question 17

If an investor who previously sold futures contracts wishes to liquidate his or her position,he or she could sell futures contracts with the same maturity date.

Accepted Answer

To liquidate a short position in futures, the investor must buy back futures contracts with the same maturity date, not sell them.

Question 18

Currency options are only traded on exchanges.That is,there is no over-the-counter market for options.

Accepted Answer

Currency options can be traded both on exchanges and over-the-counter (OTC) markets. However, trading currency options on exchanges is more standardized and transparent compared to OTC markets.

Question 19

Non-deliverable forward contracts (NDFs)are frequently used for currencies in emerging markets.

Accepted Answer

Non-deliverable forward contracts are commonly used for currencies in emerging markets as they can help mitigate currency risk and provide a way for parties to hedge against potential currency fluctuations.

Question 20

The spot rate for the Singapore dollar is $.588.The 30-day forward rate is $.590.The forward rate contains an annualized __________ of ___________%.
A) discount;-4.07
B) premium;4.07
C) discount;-4.08
D) premium;4.08
E) premium;3.40

Accepted Answer

The forward rate is higher than the spot rate, so it is at a premium.

To calculate the annualized percentage, we use the formula:

[(Forward rate - Spot rate) / Spot rate] x (360 / days in the forward period) x 100

= [($.590 - $.588) / $.588] x (360 / 30) x 100

= 0.0034 x 12 x 100

= 4.08%

So, the annualized premium is 4.08%, and the correct answer is D.

Quiz 5: Currency Derivatives

Both call and put option premiums are affected by the level of the existing spot price relative to the strike price;for example,a high spot price relative to the strike price will result in a relatively high premium for a call option but a relatively low premium for a put option.

If you have a position where you might be obligated to buy Euros,you are:

Which of the following is true for futures,but not for forwards