Exam 5: Currency Derivatives

Which of the following would result in a profit of a euro futures contract when the euro depreciates?

Forward contracts are the best technique for managing exposure arising from project bidding.

The lower bound of a put option premium is the greater of zero and the difference between the exercise price and the spot rate; the upper bound of a currency put option is the exercise price.

Your company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to hedge your position by selling Japanese yen forward. The current spot rate of the yen is $.0089, while the forward rate is $.0095. You expect the spot rate in 60 days to be $.0090. How many dollars will you receive for the 5,000,000 yen 60 days from now?

If the forward rate for a currency is less than the spot rate for that currency, the forward rate is said to exhibit a premium.

Assume the spot rate of the Swiss franc is $.62 and the one-year forward rate is $.66. The forward rate exhibits a ____ of ____.

A speculator in futures contracts expecting the value of a foreign currency to depreciate would likely sell futures contracts.

When the futures price is above the forward rate, astute investors may attempt to simultaneously buy a currency forward and sell futures in that currency. These actions would place ____ pressure on the forward rate and ____ pressure on the futures rate.

With a bull spread, the spreader believes that the underlying currency will appreciate substantially, even more so than with a strangle.

A currency call option grants the right to sell a specific currency at a designated price within a specific time period.

An MNC frequently uses either forward or futures contracts to hedge its exposure to foreign payables. To do so, the MNC can either sell the foreign currency forward or sell futures.

The existing spot rate of the Canadian dollar is $.82. The premium on a Canadian dollar call option is $.04. The exercise price is $.81. The option will be exercised on the expiration date if at all. If the spot rate on the expiration date is $.87, the profit as a percent of the initial investment (the premium paid) is:

The disadvantage of a long strangle relative to a long straddle is that the underlying currency has to fluctuate more prior to expiration.

On January 1^st, Madison Co. ordered raw material from Japan and agreed to pay 100 million yen for this order on April 1^st. It negotiated a 3-month forward contract to obtain 100 million Japanese yen on that date at $.009. On February 1^st, the Japanese firm informed Madison Co. that it won't be able to fulfill that order. The Japanese yen spot rate on February 1^st is $.0087 and 2-month forward rate exhibits 3% discount. To offset its existing contract Madison Co. will negotiate a forward contract to ____ for the date of April 1^st and the profit/loss generated from this transaction is a ____ U.S. dollars.

If you expect the euro to depreciate, it would be appropriate to ____ for speculative purposes.

Hedgers should buy calls if they are hedging an expected outflow of foreign currency.

A U.S. corporation has purchased currency call options to hedge a 70,000 pound payable. The premium is $.02 and the exercise price of the option is $.50. If the spot rate at the time of maturity is $.65, what is the total amount paid by the corporation if it acts rationally?

The 180-day forward rate for the euro is $1.34, while the current spot rate of the euro is $1.29. What is the annualized forward premium or discount of the euro?

The spot rate of British pound is quoted at $1.49. The 90-day forward rate exhibits a 2% discount. What is the 90-day forward rate of the pound?

If you have a position where you might be obligated to buy Euros, you are: