Exam 7: Foreign Currency Derivatives: Futures and Options

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

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Question 1

Correct Answer:

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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.

Your U.S firm has an accounts payable denominated in UK pounds due in 6 months. To protect yourself against unexpected changes in the dollar/pound exchange rate you should:

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Question 2

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The Lambda of an option is defined as:

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Question 3

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The expected change in the option premium from a small change in the foreign interest rate (foreign currency) is termed vega.

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Question 4

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

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Question 5

The sensitivity of the option premium to a small change in the spot exchange rate is called the gamma.

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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?

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Question 7

The Rho of an option is defined as:

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Question 8

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

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Question 9

Jasper Pernik is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ and the 6-month forward rate is ¥128.53/$. Jasper would earn a higher rate of return by buying yen and selling a forward contract than if he had invested her money in 6-month U.S. Treasury securities at an annual rate of 2.50%.

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Question 10

If the spot rate changes from $1.70/£ to $1.71/£ and there is an option with an initial premium of $0.033/£ and a delta of 0.5, then the new option premium would be:

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Question 11

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).

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Question 12

Option values increase with the length of time to maturity. The expected change in the option premium from a small change in the time to expiration is termed delta.

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Question 13

A trader who is buying options of longer maturities will pay more, and proportionately more, for the longer maturity options.

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Question 14

Jasper Pernik is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ and the 6-month forward rate is ¥128.53/$. Jasper thinks the yen will move to ¥128.00/$ in the next six months. If Jasper buys $100,000 worth of yen at today's spot price and sells within the next six months at ¥128/$, he will earn a profit of:

(Multiple Choice)

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Question 15

The Delta of an option is defined as:

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Question 16

The Phi of an option is defined as:

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Question 17

The maximum gain for the purchaser of a call option contract is while the maximum loss is .

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Question 18

For a $1.50/£ call option with an initial premium of $0.033/£ and a lambda of 0.4, after an increase in annual volatility of 1 percent point - for example from 10% to 11% - the new option premium would be:

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Question 19

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

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Question 20

Showing 1 - 20 of 88

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

Your U.S firm has an accounts payable denominated in UK pounds due in 6 months. To protect yourself against unexpected changes in the dollar/pound exchange rate you should:

The Lambda of an option is defined as:

The expected change in the option premium from a small change in the foreign interest rate (foreign currency) is termed vega.

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

The sensitivity of the option premium to a small change in the spot exchange rate is called the gamma.

The Rho of an option is defined as:

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

If the spot rate changes from $1.70/£ to $1.71/£ and there is an option with an initial premium of $0.033/£ and a delta of 0.5, then the new option premium would be:

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).

Option values increase with the length of time to maturity. The expected change in the option premium from a small change in the time to expiration is termed delta.

A trader who is buying options of longer maturities will pay more, and proportionately more, for the longer maturity options.

The Delta of an option is defined as:

The Phi of an option is defined as:

The maximum gain for the purchaser of a call option contract is while the maximum loss is .

For a $1.50/£ call option with an initial premium of $0.033/£ and a lambda of 0.4, after an increase in annual volatility of 1 percent point - for example from 10% to 11% - the new option premium would be:

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

Multinational Financial Management: Opportunities and Challenges

The International Monetary System

The Balance of Payments

Financial Goals and Corporate Governance

The Foreign Exchange Market

International Parity Conditions

Interest Risk and Swaps

Foreign Exchange Rate Determination and Intervention

Transaction Exposure

Translation Exposure

Operating Exposure

Global Cost and Availability of Capital

Funding the Multinational Firm

Multinational Tax Management

International Trade Finance

Foreign Direct Investment and Political Risk

Multinational Capital Budgeting and Cross-Border Acquisitions

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Exam 7: Foreign Currency Derivatives: Futures and Options

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

Your U.S firm has an accounts payable denominated in UK pounds due in 6 months. To protect yourself against unexpected changes in the dollar/pound exchange rate you should:

The Lambda of an option is defined as:

The expected change in the option premium from a small change in the foreign interest rate (foreign currency) is termed vega.

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

The sensitivity of the option premium to a small change in the spot exchange rate is called the gamma.

The Rho of an option is defined as:

The ________ of an option is the value if the option were to be exercised immediately. It is the option's ________ value.

If the spot rate changes from $1.70/£ to $1.71/£ and there is an option with an initial premium of $0.033/£ and a delta of 0.5, then the new option premium would be:

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).

Option values increase with the length of time to maturity. The expected change in the option premium from a small change in the time to expiration is termed delta.

A trader who is buying options of longer maturities will pay more, and proportionately more, for the longer maturity options.

The Delta of an option is defined as:

The Phi of an option is defined as:

The maximum gain for the purchaser of a call option contract is ________ while the maximum loss is ________.

For a $1.50/£ call option with an initial premium of $0.033/£ and a lambda of 0.4, after an increase in annual volatility of 1 percent point - for example from 10% to 11% - the new option premium would be:

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

Multinational Financial Management: Opportunities and Challenges

The International Monetary System

The Balance of Payments

Financial Goals and Corporate Governance

The Foreign Exchange Market

International Parity Conditions

Interest Risk and Swaps

Foreign Exchange Rate Determination and Intervention

Transaction Exposure

Translation Exposure

Operating Exposure

Global Cost and Availability of Capital

Funding the Multinational Firm

Multinational Tax Management

International Trade Finance

Foreign Direct Investment and Political Risk

Multinational Capital Budgeting and Cross-Border Acquisitions

Filters

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

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

The maximum gain for the purchaser of a call option contract is while the maximum loss is .