Question 1

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 2

Why are foreign currency futures contracts more popular with individuals and banks while foreign currency forwards are more popular with businesses?

Accepted Answer

Foreign currency futures are standardized contracts that lend themselves well to speculation purposes but less so for hedging purposes. The standardized nature of the futures contract makes it easy to trade futures and to make bets about general changes in the value of currencies. Forward contracts are better for hedging in that they are tailored to meet the specific needs of the client, typically a business, and can be quite useful in reducing exchange rate risk. Banks are involved in the foreign currency futures market in part to offset positions that they may have taken in the forward markets as dealers.

Question 3

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

A speculator who sells a futures contract is taking a short position, betting that the price of the underlying asset will decrease.

Question 4

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

Jack lost money because the value of the dollar appreciated against the pound, meaning he sold the futures for less than he bought them. The calculation is (1.4400 - 1.4250) * £62,500 = $937.50 loss.

Question 5

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

Accepted Answer

Currency futures contracts are commonly traded in financial markets around the world.

Question 6

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 believes that the U.K. pound will decrease in value relative to the U.S. dollar, he should sell a pound currency futures contract. This means that he will agree to sell pounds at the current rate of $1.44/£, and if his expectations are correct, he will be able to buy pounds at a lower rate in six months to fulfill the contract, earning him a profit. Buying a pound currency futures contract, selling pounds today, or selling pounds in six months would not result in a profit if Peter's expectations are correct.

Question 7

Compare and contrast foreign currency options and futures. Identify situations when you may prefer one vs. the other when speculating on foreign exchange.

Accepted Answer

The answer of Compare and contrast foreign currency options and...

Question 8

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 required for a futures contract is called margin. It is a sum of money that is held as collateral by the exchange to cover any potential losses that may arise from the contract. As the value of the underlying asset changes, the margin may need to be adjusted to maintain the appropriate level of collateral.

Question 9

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 10

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 (taking on risk in order to potentially earn a higher return) and hedging (reducing or eliminating risk). They are not typically used for human resource management.

Question 11

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 price, while a foreign currency put option gives the holder the right to sell a foreign currency at a predetermined price. Therefore, the correct answer is (A) call, buy, put, sell.

Question 12

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

A European option can only be exercised on its expiration date, while an American option can be exercised at any time before and including its expiration date.

Question 13

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 14

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 listed are actual differences between currency futures contracts and forward contracts. Therefore, none of them are NOT differences between the two contracts.

Question 15

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 listed contract specifications (size of the contract, maturity date, and last trading day) are actually specified in currency futures trading on an organized exchange. Therefore, option D is not a correct answer.

Question 16

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 strike price is the predetermined price at which the underlying asset can be bought or sold when exercising an option. The premium is the cost of the option itself, the spot rate is the current market price of the asset, and commission is a fee paid to a broker for executing a trade.

Question 17

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 18

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. Futures and forwards require the buyer to purchase the foreign currency at a predetermined price at a future date, while swaps involve exchanging one currency for another at an agreed-upon rate.

Question 19

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

Currency futures contracts are standardized for trading on an exchange market, meaning that they have predetermined contract sizes, delivery dates, and settlement prices. This allows for easier trading and liquidity. On the other hand, forward contracts are customized contracts between two parties and have more flexibility in terms of contract size, delivery dates, and settlement prices to meet the specific needs of the clients.

Question 20

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

Accepted Answer

A call option is said to be in-the-money when the exercise price is less than the spot price, allowing the holder to make an immediate profit by exercising the option. At-the-money refers to a call option where the exercise price is equal to the spot price. Therefore, a call option whose exercise price exceeds the spot price is said to be out-of-the-money, as exercising the option would not result in an immediate profit. Finally, "over-the-spot" is not a commonly used term in options trading.

Quiz 8: Foreign Currency Derivatives

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

Why are foreign currency futures contracts more popular with individuals and banks while foreign currency forwards are more popular with businesses?

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

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

Compare and contrast foreign currency options and futures. Identify situations when you may prefer one vs. the other when speculating on foreign exchange.

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

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

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

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.

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 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 difference between a currency futures contract and a forward contract?

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

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

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

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.

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 call option whose exercise price exceeds the spot price is said to be ________.