Question 1

The buyer of a long put option:

Accepted Answer

A) has a maximum loss equal to the premium paid. 
B) has a gain equal to but opposite in sign to the writer of the option. 
C) has maximum gain potential limited to the difference between the strike price and the premium paid. 
D) all of the above 
A) has a maximum loss equal to the premium paid. 
B) has a gain equal to but opposite in sign to the writer of the option. 
C) has maximum gain potential limited to the difference between the strike price and the premium paid. 
D) all of the above

Question 2

A swap agreement may involve currencies or interest rates, but never both.

Accepted Answer

A) True 
 B)False

Question 3

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

Accepted Answer

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. 
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.

Question 4

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. The risk of strategy #1 is that interest rates might go down or that your credit rating might improve. The risk of strategy #2 is: (Assume your firm is borrowing money.)

Accepted Answer

A) that interest rates might go down or that your credit rating might improve. 
B) that interest rates might go up or that your credit rating might improve. 
C) that interest rates might go up or that your credit rating might get worse. 
D) none of the above 
A) that interest rates might go down or that your credit rating might improve. 
B) that interest rates might go up or that your credit rating might improve. 
C) that interest rates might go up or that your credit rating might get worse. 
D) none of the above

Question 5

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?

Accepted Answer

A) Sell a pound currency futures contract. 
B) Buy a pound currency futures contract. 
C) Sell pounds today. 
D) Sell pounds in six months. 
A) Sell a pound currency futures contract. 
B) Buy a pound currency futures contract. 
C) Sell pounds today. 
D) Sell pounds in six months.

The buyer of a long put option:

A swap agreement may involve currencies or interest rates, but never both.

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

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

The buyer of a long put option:

A swap agreement may involve currencies or interest rates, but never both.

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

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