Question 1

An option whose exercise price is equal to the spot rate is said to be ________.
A)in-the-money
B)at-the-money
C)out-of-the-money
D)on-the-spot

Accepted Answer

An option whose exercise price is equal to the spot rate is said to be at-the-money.

Question 2

Assume that a call option has an exercise price of $1.50/³.At a spot price of $1.45/³,the call option has ________.
A)a time value of $0.04
B)a time value of $0.00
C)an intrinsic value of $0.00
D)an intrinsic value of -$0.04

Accepted Answer

The intrinsic value of the call option is the difference between the spot price and the exercise price, which is $0 in this case since spot price is less than the exercise price. As the call option has no intrinsic value, it also has no time value. Therefore, the best choice is C, an intrinsic value of $0.00.

Question 3

The most widely used reference rate for standardized quotations,loan agreements,or financial derivative valuations is the ________.
A)Federal Reserve Discount rate
B)federal funds rate
C)LIBOR
D)one-year U.S. Treasury Bill

Accepted Answer

LIBOR (London Interbank Offered Rate) is the most widely used reference rate for standardized quotations, loan agreements or financial derivative valuations. It is an interest rate at which banks can borrow funds from other banks in the London interbank market. LIBOR is used as a benchmark for short-term interest rates globally and is quoted for several currencies and different maturities, making it a commonly referenced rate in the financial industry.

Question 4

Other things equal,the price of an option goes up as the volatility of the option decreases.

Accepted Answer

The price of an option actually goes up as the volatility of the option increases. This is because higher volatility increases the likelihood that the option will end up in-the-money, which increases its value.

Question 5

The value of a European style call option is the sum of two components,the
A)present value plus the intrinsic value.
B)time value plus the present value.
C)intrinsic value plus the time value.
D)the intrinsic value plus the standard deviation.

Accepted Answer

The value of a European style call option is the sum of its intrinsic value and time value. Intrinsic value refers to the difference between the underlying asset's spot price and the option's strike price. Time value is the additional amount that an option holder is willing to pay beyond its intrinsic value in the hope that the option's price will increase, making it more valuable. Therefore, the correct answer is option C, which states that the value of a European style call option is the sum of its intrinsic value plus the time value.

Question 6

Instruction 8.1:
For the following problem(s), consider these debt strategies being considered by a corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year period.
∙ Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%.
∙ Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%,
to be reset annually. The current LIBOR rate is 3.50%
∙ Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the
credit annually. The current one-year rate is 5%.
-Refer to Instruction 8.1.Choosing strategy #1 will
A)guarantee the lowest average annual rate over the next three years.
B)eliminate credit risk but retain repricing risk.
C)maintain the possibility of lower interest costs, but maximizes the combined credit and repricing risks.
D)preclude the possibility of sharing in lower interest rates over the three-year period.

Accepted Answer

Strategy #1 involves borrowing at a fixed rate of interest, which means the interest rate will not change over the life of the loan, eliminating the possibility of benefiting from any potential decreases in interest rates.

Question 7

The ________ of an option is the value if the option were to be exercised immediately.It is the options ________ value.
A)intrinsic value; maximum
B)intrinsic value; minimum
C)time value; maximum
D)time value; minimum

Accepted Answer

The intrinsic value of an option is the value it would have if it were exercised immediately, representing the minimum value of the option, not considering the time value or potential for future price changes.

Question 8

The main advantage(s)of over-the-counter foreign currency options over exchange traded options is(are)
A)expiration dates tailored to the needs of the client.
B)amounts that are tailor made.
C)client desired expiration dates.
D)all of the above.

Accepted Answer

All of the above advantages are true for over-the-counter foreign currency options. Clients can negotiate expiration dates and amounts to fit their specific needs, making them more tailored and flexible than exchange traded options.

Question 9

All exchange-traded options are settled through a clearing house but over-the-counter options are not and are thus subject to greater ________ risk.
A)exchange rate
B)country
C)counterparty
D)none of the above

Accepted Answer

Counterparty risk refers to the risk that the other party in a financial transaction will not fulfill their obligations. In the case of over-the-counter options, because they are not settled through a clearing house, there is a greater risk that the counterparty may default on their obligations, resulting in losses for the investor. Exchange-traded options, on the other hand, are settled through a clearing house, which acts as a counterparty to both parties in the transaction, thereby reducing counterparty risk.

Question 10

The single largest interest rate risk of a firm is ________.
A)interest sensitive securities
B)debt service
C)dividend payments
D)accounts payable

Accepted Answer

Debt service, or the payments a firm must make on its outstanding debt, represents the single largest interest rate risk because a rise in interest rates would increase the cost of borrowing and therefore increase the amount of debt service payments the firm must make, potentially putting a strain on its cash flow and overall financial stability. Interest sensitive securities may also be subject to interest rate risk, but these typically represent a smaller portion of a firm's overall financial holdings. Dividend payments and accounts payable are not typically affected by changes in interest rates.

Question 11

TABLE 8.1
Use the below mentioned table to answer the following question(s).
April 19, 2010, British Pound Option Prices (cents per pound, 62,500 pound contracts).
 
-Refer to Table 8.1.The May call option on pounds with a strike price of 1440 means ________.
A)$88/£ per contract
B)$0.88/£
C)$0.0088/£
D)none of the above

Accepted Answer

The answer of TABLE 8.1
Use the below mentioned table to...

Question 12

As a general statement,it is safe to say that businesses generally use the ________ for foreign currency option contracts,and individuals and financial institutions typically use the ________.
A)exchange markets; over-the-counter
B)over-the-counter; exchange markets
C)private; government sponsored
D)government sponsored; private

Accepted Answer

Businesses typically use exchange markets for foreign currency option contracts as they often need large amounts of currency and want the price transparency and liquidity provided by exchange-traded contracts. On the other hand, individuals and financial institutions often use over-the-counter (OTC) contracts as they have more flexibility in terms of contract customization and can negotiate directly with their counterparties.

Question 13

Foreign currency options are available both over-the-counter and on organized exchanges.

Accepted Answer

Foreign currency options can be traded both on organized exchanges, such as the Chicago Mercantile Exchange, and over-the-counter (OTC) between private parties.

Question 14

TABLE 8.1
Use the below mentioned table to answer the following question(s).
April 19, 2010, British Pound Option Prices (cents per pound, 62,500 pound contracts).
 
-Refer to Table 8.1.The exercise price of ________ giving the purchaser the right to sell pounds in June has a cost per pound of ________ for a total price of ________.
A)1460; 0.68 cents; $425.00
B)1440; 1.06 cents; $662.50
C)1450; 1.02 cents; $637.50
D)1440; 1.42 cents; $887.50

Accepted Answer

The answer of TABLE 8.1
Use the below mentioned table to...

Question 15

The time value is asymmetric in value as you move away from the strike price.(i.e.,the time value at two cents above the strike price is not necessarily the same as the time value two cents below the strike price.)

Accepted Answer

The answer of The time value is asymmetric in value...

Question 16

Which of the following is NOT a factor in determining the price of a currency option?
A)the present spot rate
B)the time to maturity
C)the standard deviation of the daily spot price movement
D)All of the above are factors in determining the premium price.

Accepted Answer

All of the listed factors (present spot rate, time to maturity, and standard deviation of daily spot price movement) are commonly considered in determining the price of a currency option. Therefore, D is not the correct answer.

Question 17

Instruction 8.1:
For the following problem(s), consider these debt strategies being considered by a corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year period.
∙ Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%.
∙ Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%,
to be reset annually. The current LIBOR rate is 3.50%
∙ Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the
credit annually. The current one-year rate is 5%.
-Refer to Instruction 8.1.Choosing strategy #3 will
A)guarantee the lowest average annual rate over the next three years.
B)eliminate credit risk but retain repricing risk.
C)maintain the possibility of lower interest costs, but maximizes the combined credit and repricing risks.
D)preclude the possibility of sharing in lower interest rates over the three-year period.

Accepted Answer

Strategy #3 involves borrowing at a fixed rate for one year and then renewing annually, which keeps the possibility of benefiting from lower rates but increases both credit and repricing risks since the rates could change each year and there's uncertainty about future borrowing costs.

Question 18

________ is the possibility that the borrower's creditworthiness is reclassified by the lender at the time of renewing credit.________ is the risk of changes in interest rates charged at the time a financial contract rate is set.
A)Credit risk; Interest rate risk
B)Repricing risk; Credit risk
C)Interest rate risk; Credit risk
D)Credit risk; Repricing risk

Accepted Answer

Credit risk involves the possibility of a borrower's creditworthiness being reclassified by the lender, often at the time of credit renewal. Repricing risk is related to the risk of changes in interest rates at the time a financial contract's rate is determined.

Question 19

TABLE 8.1
Use the below mentioned table to answer the following question(s).
April 19, 2010, British Pound Option Prices (cents per pound, 62,500 pound contracts).
 
-Refer to Table 8.1.What was the closing price of the British pound on April 18,2010?
A)$1.448/£
B)£1.448/$
C)$14.48/£
D)None of the above

Accepted Answer

The closing price of the British pound on April 18, 2010 was $1.448/£.

Question 20

Instruction 8.1:
For the following problem(s), consider these debt strategies being considered by a corporate borrower. Each is intended to provide $1,000,000 in financing for a three-year period.
∙ Strategy #1: Borrow $1,000,000 for three years at a fixed rate of interest of 7%.
∙ Strategy #2: Borrow $1,000,000 for three years at a floating rate of LIBOR + 2%,
to be reset annually. The current LIBOR rate is 3.50%
∙ Strategy #3: Borrow $1,000,000 for one year at a fixed rate, and then renew the
credit annually. The current one-year rate is 5%.
-Refer to Instruction 8.1.Choosing strategy #2 will
A)guarantee the lowest average annual rate over the next three years.
B)eliminate credit risk but retain repricing risk.
C)maintain the possibility of lower interest costs, but maximizes the combined credit and repricing risks.
D)preclude the possibility of sharing in lower interest rates over the three-year period.

Accepted Answer

The answer of Instruction 8.1:
For the following problem(s), consider these...

Quiz 8: Foreign Currency Derivatives and Swaps

An option whose exercise price is equal to the spot rate is said to be ________.

Assume that a call option has an exercise price of $1.50/³.At a spot price of $1.45/³,the call option has ________.

The most widely used reference rate for standardized quotations,loan agreements,or financial derivative valuations is the ________.

Other things equal,the price of an option goes up as the volatility of the option decreases.

The value of a European style call option is the sum of two components,the

The of an option is the value if the option were to be exercised immediately.It is the options value.

The main advantage(s) of over-the-counter foreign currency options over exchange traded options is(are)

All exchange-traded options are settled through a clearing house but over-the-counter options are not and are thus subject to greater ________ risk.

The single largest interest rate risk of a firm is ________.

TABLE 8.1 Use the below mentioned table to answer the following question(s) . April 19, 2010, British Pound Option Prices (cents per pound, 62,500 pound contracts) . -Refer to Table 8.1.The May call option on pounds with a strike price of 1440 means ________.

As a general statement,it is safe to say that businesses generally use the for foreign currency option contracts,and individuals and financial institutions typically use the .

Foreign currency options are available both over-the-counter and on organized exchanges.

The time value is asymmetric in value as you move away from the strike price.(i.e.,the time value at two cents above the strike price is not necessarily the same as the time value two cents below the strike price.)

Which of the following is NOT a factor in determining the price of a currency option?

is the possibility that the borrower's creditworthiness is reclassified by the lender at the time of renewing credit. is the risk of changes in interest rates charged at the time a financial contract rate is set.

TABLE 8.1 Use the below mentioned table to answer the following question(s) . April 19, 2010, British Pound Option Prices (cents per pound, 62,500 pound contracts) . -Refer to Table 8.1.What was the closing price of the British pound on April 18,2010?