Question 1

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

Accepted Answer

A) in-the-money. 
B) at-the-money. 
C) out-of-the-money. 
D) on-the-spot. 
A) in-the-money. 
B) at-the-money. 
C) out-of-the-money. 
D) on-the-spot.

Question 2

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. After the fact, under which set of circumstances would you prefer strategy #1? (Assume your firm is borrowing money.)

Accepted Answer

A) Your credit rating stayed the same and interest rates went up. 
B) Your credit rating stayed the same and interest rates went down. 
C) Your credit rating improved and interest rates went down. 
D) Not enough information to make a judgment. 
A) Your credit rating stayed the same and interest rates went up. 
B) Your credit rating stayed the same and interest rates went down. 
C) Your credit rating improved and interest rates went down. 
D) Not enough information to make a judgment.

Question 3

Most option profits and losses are realized through taking actual delivery of the currency rather than offsetting contracts.

Accepted Answer

A) True 
 B)False

Question 4

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.

Accepted Answer

A) call, buy, put, sell 
B) call, sell, put, buy 
C) put, hold, call, release 
D) none of the above 
A) call, buy, put, sell 
B) call, sell, put, buy 
C) put, hold, call, release 
D) none of the above

Question 5

The financial manager of a firm has a variable rate loan outstanding. If she wishes to protect the firm against an unfavorable increase in interest rates she could:

Accepted Answer

A) sell an interest rate futures contract of a similar maturity to the loan. 
B) buy an interest rate futures contract of a similar maturity to the loan. 
C) swap the adjustable rate loan for another of a different maturity. 
D) none of the above 
A) sell an interest rate futures contract of a similar maturity to the loan. 
B) buy an interest rate futures contract of a similar maturity to the loan. 
C) swap the adjustable rate loan for another of a different maturity. 
D) none of the above

Question 6

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

Accepted Answer

A) sold; long 
B) purchased; short 
C) sold; short 
D) purchased; sold 
A) sold; long 
B) purchased; short 
C) sold; short 
D) purchased; sold

Question 7

Counterparty risk is greater for exchange-traded derivatives than for over-the-counter derivatives.

Accepted Answer

A) True 
 B)False

Question 8

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's expectations are correct, then he could profit in the forward market by ________ and then ________.

Accepted Answer

A) buying yen for ¥128.00/$; selling yen at ¥128.53/$ 
B) buying yen for ¥128.53/$; selling yen at ¥128.00/$ 
C) There is not enough information to answer this question 
D) He could not profit in the forward market. 
A) buying yen for ¥128.00/$; selling yen at ¥128.53/$ 
B) buying yen for ¥128.53/$; selling yen at ¥128.00/$ 
C) There is not enough information to answer this question 
D) He could not profit in the forward market.

Question 9

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

Accepted Answer

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. 
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.

Question 10

A call option on UK pounds has a strike price of $2.05/£ and a cost of $0.02. What is the break-even price for the option?

Accepted Answer

A) $2.03/£ 
B) $2.07/£ 
C) $2.05/£ 
D) The answer depends upon if this is a long or a short call option. 
A) $2.03/£ 
B) $2.07/£ 
C) $2.05/£ 
D) The answer depends upon if this is a long or a short call option.

Question 11

A call option whose exercise price exceeds the spot price is said to be:

Accepted Answer

A) in-the-money. 
B) at-the-money. 
C) out-of-the-money. 
D) over-the-spot. 
A) in-the-money. 
B) at-the-money. 
C) out-of-the-money. 
D) over-the-spot.

Question 12

Which of the following is NOT a difference between a currency futures contract and a forward contract?

Accepted Answer

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. 
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.

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

Swap rates are derived from the yield curves in each major currency.

Accepted Answer

A) True 
 B)False

Question 15

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 ________.

Accepted Answer

A) exchange markets; over-the-counter 
B) over-the-counter; exchange markets 
C) private; government sponsored 
D) government sponsored; private 
A) exchange markets; over-the-counter 
B) over-the-counter; exchange markets 
C) private; government sponsored 
D) government sponsored; private

Question 16

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. After the fact, under which set of circumstances would you prefer strategy #2? (Assume your firm is borrowing money.)

Accepted Answer

A) Your credit rating stayed the same and interest rates went up. 
B) Your credit rating stayed the same and interest rates went down. 
C) Your credit rating improved and interest rates went down. 
D) Not enough information to make a judgment. 
A) Your credit rating stayed the same and interest rates went up. 
B) Your credit rating stayed the same and interest rates went down. 
C) Your credit rating improved and interest rates went down. 
D) Not enough information to make a judgment.

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. Which strategy (strategies)will eliminate credit risk?

Accepted Answer

A) Strategy #1 
B) Strategy #2 
C) Strategy #3 
D) Strategies #1 and #2 
A) Strategy #1 
B) Strategy #2 
C) Strategy #3 
D) Strategies #1 and #2

Question 18

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

Accepted Answer

A) futures 
B) forward 
C) option 
D) swap 
A) futures 
B) forward 
C) option 
D) swap

Question 19

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. After the fact, under which set of circumstances would you prefer strategy #3? (Assume your firm is borrowing money.)

Accepted Answer

A) Your credit rating stayed the same and interest rates went up. 
B) Your credit rating stayed the same and interest rates went down. 
C) Your credit rating improved and interest rates went down. 
D) Not enough information to make a judgment. 
A) Your credit rating stayed the same and interest rates went up. 
B) Your credit rating stayed the same and interest rates went down. 
C) Your credit rating improved and interest rates went down. 
D) Not enough information to make a judgment.

Question 20

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

Foreign currency futures are derivative

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

Most option profits and losses are realized through taking actual delivery of the currency rather than offsetting contracts.

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.

The financial manager of a firm has a variable rate loan outstanding. If she wishes to protect the firm against an unfavorable increase in interest rates she could:

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

Counterparty risk is greater for exchange-traded derivatives than for over-the-counter derivatives.

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

A call option on UK pounds has a strike price of $2.05/£ and a cost of $0.02. What is the break-even price for the option?

A call option whose exercise price exceeds the spot price is said to be:

Which of the following is NOT a difference between a currency futures contract and a forward contract?

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

Swap rates are derived from the yield curves in each major currency.

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

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

Current Multinational Challenges and the Global Economy

Corporate Ownership, Goals, and Governance

The International Monetary System

The Balance of Payments

The Continuing Global Financial Crisis

The Foreign Exchange Theory and Markets

International Parity Conditions

Foreign Exchange Rate Determination and Forecasting

Transaction Exposure

Translation Exposure

Operating Exposure

The Global Cost and Availability of Capital

Raising Equity and Debt Globally

Multinational Tax Management

International Portfolio Theory and Diversification

Foreign Direct Investment and Political Risk

Multinational Capital Budgeting and Cross-Border Acquisitions

Working Capital Management

International Trade Finance

Filters

Exam 8: Foreign Currency Derivatives and Swaps

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

Most option profits and losses are realized through taking actual delivery of the currency rather than offsetting contracts.

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.

The financial manager of a firm has a variable rate loan outstanding. If she wishes to protect the firm against an unfavorable increase in interest rates she could:

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

Counterparty risk is greater for exchange-traded derivatives than for over-the-counter derivatives.

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

A call option on UK pounds has a strike price of $2.05/£ and a cost of $0.02. What is the break-even price for the option?

A call option whose exercise price exceeds the spot price is said to be:

Which of the following is NOT a difference between a currency futures contract and a forward contract?

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

Swap rates are derived from the yield curves in each major currency.

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

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

Current Multinational Challenges and the Global Economy

Corporate Ownership, Goals, and Governance

The International Monetary System

The Balance of Payments

The Continuing Global Financial Crisis

The Foreign Exchange Theory and Markets

International Parity Conditions

Foreign Exchange Rate Determination and Forecasting

Transaction Exposure

Translation Exposure

Operating Exposure

The Global Cost and Availability of Capital

Raising Equity and Debt Globally

Multinational Tax Management

International Portfolio Theory and Diversification

Foreign Direct Investment and Political Risk

Multinational Capital Budgeting and Cross-Border Acquisitions

Working Capital Management

International Trade Finance

Filters

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 speculator that has a futures contract has taken a position.

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 .