Chapter 8 - Foreign Currency Derivatives
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Chapter 8 - Foreign Currency Derivatives

Course Code: FINS3616, Semester Three 2012

University or Institution: UNSW

Word Count: 3020

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Fundamentals of Multinational Finance, 3e (Moffett) Chapter 8 1 Foreign Currency Derivatives 8.1 Mul 1) 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. Answer: D Topic: Financial Derivatives Skill: Recognition 2) A foreign ________ contract calls for the...

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of Fundamentals Multinational Finance, 3e (Moffett) Chapter 8 1 Foreign Currency Derivatives 8.1 Mul 1) 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. Register to View Answer Topic: Financial Derivatives Skill: Recognition 2) A foreign ________ contract calls for the future delivery of a standard amount of foreign exchange at a fixed time, currency place, and price. A) futures B) forward C) option D) swap Register to View Answer Topic: Futures Contract Skill: Recognition 3) Currency futures contracts have become standard fare and trade readily in the world money centers. Register to View Answer Topic: Futures Contract Skill: Recognition 4) The major currency futures and forward contracts is that futures contracts are standardized for ease of trading on an difference exchange market whereas forward contracts are specialized and tailored to meet the needs of clients. between Register to View Answer Topic: Futures Contract Skill: Recognition 5) Which of the following is NOT a contract specification for currency futures trading on an organized exchange? A) size of the B) contract maturity date C) last trading day D) All of the above are specified. Register to View Answer Topic: Futures Contract Skill: Recognition 6) 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% Register to View Answer Topic: Futures Contract Skill: Analytical 7) 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. Register to View Answer Topic: Futures Contract Provisions Skill: Recognition 8) A in the futures market wishing to lock in a price at which they could ________ a foreign currency will speculator ________ a futures contract. A) buy; sell B) sell; buy C) buy; buy D) none of the above Register to View Answer Topic: Currency Speculation Skill: Conceptual 9) A speculator that has ________ a futures contract has taken a ________ position. A) sold; long B) purchased; C) short sold; short D) purchased; sold Register to View Answer Topic: Currency Speculation Skill: Recognition 10) Peter the U.K. pound will cost $1.43/ in six months. A 6-month currency futures contract is available today at Simpson a rate of $1.44/. If Peter was to speculate in the currency futures market, and his expectations are thinks that correct, which of the following strategies would earn him a profit? A) Sell a pound B) currency futures contract. Buy a pound C) currency futures contract. Sell pounds D) today. Sell pounds in six months. Register to View Answer Topic: Currency Speculation Skill: Conceptual 11) Jack 3-month British pound futures contract for $1.4400/ only to see the dollar appreciate to a value of Hemming $1.4250 at which time he sold the pound futures. If each pound futures contract is for an amount of s bought a 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 Register to View Answer Topic: Currency Futures Skill: Analytical 12) Which of the following statements regarding currency futures contracts and forward contracts is NOT true? A) A futures B) contract is a standardized amount per currency whereas the forward contact is for any size desired. A futures fixed maturity whereas the forward contract is for any maturity you like up to one year. contract is for a C) Futures on organized exchanges whereas forwards take place between individuals and banks with other contracts trade banks via telecom linkages. D) All of the above are true. Register to View Answer Topic: Currency Futures/Forwards Skill: Conceptual 13) Which of the following is NOT a difference between a currency futures contract and a forward contract? A) The futures contract is B) marked to market daily whereas the forward contract is only due to be settled at maturity. The the futures participant is unknown with the clearinghouse stepping into each transaction whereas counterparty to the forward contract participants are in direct contact setting the forward specifications. C) A single sales covers both the purchase and sale of a futures contract whereas there is no specific sales commission commission with a forward contract because banks earn a profit through the bid-ask spread. D) All of the above are true. Register to View Answer Topic: Currency Futures/Forwards Skill: Conceptual 14) A foreign ________ gives the purchaser the right, not the obligation, to buy a given amount of foreign exchange at currency a fixed price per unit for a specified period. A) future B) forward C) option D) swap Register to View Answer Topic: Currency Options Skill: Recognition 15) A foreign ________ option gives the holder the right to ________ a foreign currency whereas a foreign currency 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 Register to View Answer Topic: Currency Options Skill: Recognition 16) The writer of the option is referred to as the seller, and the buyer of the option is referred to as the holder. Register to View Answer Topic: Currency Options Skill: Recognition 17) The price at which an option can be exercised is called the ________. A) premium B) spot rate C) strike price D) commission Register to View Answer Topic: Currency Options Skill: Recognition 18) 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; B) European American; C) British Asian; D) American European; American Register to View Answer Topic: Currency Options Skill: Recognition 19) A call option whose exercise price exceeds the spot rate is said to be ________. A) in-the-money B) at-the-money C) out-of-theD) money over-the-spot Register to View Answer Topic: Currency Options Skill: Recognition 20) A call option whose exercise price is less than the spot rate is said to be ________. A) in-the-money B) at-the-money C) out-of-theD) money under-the-spot Register to View Answer Topic: Currency Options Skill: Recognition 21) An option whose exercise price is equal to the spot rate is said to be ________. A) in-the-money B) at-the-money C) out-of-theD) money on-the-spot Register to View Answer Topic: Currency Options Skill: Recognition 22) Foreign currency options are available both over-the-counter and on organized exchanges. Register to View Answer Topic: Currency Options Skill: Recognition 23) The main advantage(s) of over-the-counter foreign currency options over exchange traded options is(are) A) expiration dates tailored to the needs of the client. B) amounts that C) are tailor made. client desired expiration dates. D) all of the above. Register to View Answer Topic: Currency Options Skill: Recognition 24) 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) exchange B) markets; over-the-counter over-theC) counter; exchange markets private; D) government sponsored government sponsored; private Register to View Answer Topic: Currency Options Skill: Recognition 25) All traded options are settled through a clearing house but over-the-counter options are not and are thus exchange- subject to greater ________ risk. A) exchange rate B) country C) counterparty D) none of the above Register to View Answer Topic: Currency Options Skill: Recognition 26) When reading the futures quotation in the financial section of the newspaper, the column heading indicating the number of contracts outstanding is called ________. A) contracts B) outstanding settle C) open interest D) short positions Register to View Answer Topic: Currency Futures Skill: Recognition 27) The amount that an investor pays to obtain an option may be described as the ________. A) premium B) price C) cost D) all of the above Register to View Answer Topic: Currency Options Skill: Recognition TABLE 7.1 Use the below mentioned table to answer following question(s). April 19, 2002, British Pound Option Prices (cents per pound, 62,500 pound contracts). 28) Refer to Table 7.1. What was the closing price of the British pound on April 18, 2002? A) $1.448/ B) 1.448/$ C) $14.48/ D) None of the above Register to View Answer Topic: Currency Options Skill: Analytical 29) Refer to The exercise price of ________ giving the purchaser the right to sell pounds in June has a cost per pound Table 7.1. of ________ for a total price of ________. A) 1460, 0.68 B) cents, $425.00 1440, 1.06 C) cents, $662.50 1450, 1.02 D) cents, $637.50 1440, 1.42 cents, $887.50 Register to View Answer Topic: Currency Options Skill: Analytical 30) Refer to Table 7.1. The May call option on pounds with a strike price of 1440 means ________. A) $88/ per B) contract $0.88/ C) $0.0088/ D) none of the above Register to View Answer Topic: Currency Options Skill: Analytical 31) Andrea who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for Cujoli is a the Japanese yen is 129.87/$ and the 6-month forward rate is 128.53/$. Andrea thinks the yen will currency move to 128.00/$ in the next six months. Andrea should ________ at ________ to profit from changing speculator currency values. A) buy yen; at the forward rate B) buy dollars; at the forward rate C) sell yen; at the forward rate D) There is not enough information to answer this question. Register to View Answer Topic: Foreign Currency Exchange Speculation Skill: Conceptual 32) Andrea who enjoys "betting" on changes in the foreign currency exchange market. the Currently spot price for Cujoli is a the Japanese yen is 129.87/$ and the 6-month forward rate is 128.53/$. Andrea thinks the yen will currency move to 128.00/$ in the next six months. If Andrea buys $100,000 worth of yen at today's spot price speculator and sells within the next six months at 128/$ she will earn a profit of ________. A) $146.09 B) $101,460.94 C) $1460.94 D) nothing; she will lose money Register to View Answer Topic: Foreign Currency Exchange Speculation Skill: Analytical 33) Andrea who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for Cujoli is a the Japanese yen is 129.87/$ and the 6-month forward rate is 128.53/$. Andrea thinks the yen will currency move to 128.00/$ in the next six months. If Andrea buys $100,000 worth of yen at today's spot price her speculator potential gain is ________ and her potential loss is ________. A) $100,000, B) unlimited unlimited, C) unlimited $100,000, D) $100,000 unlimited, $100,000 Register to View Answer Topic: Foreign Currency Exchange Speculation Skill: Analytical 34) Andrea who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for Cujoli is a the Japanese yen is 129.87/$ and the 6-month forward rate is 128.53/$. Andrea thinks the yen will currency move to 128.00/$ in the next six months. If Andrea's expectations are correct, then she could profit in speculator the forward market by ________ and then ________. 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 D) enough information to answer this question She could not profit in the forward market. Register to View Answer Topic: Foreign Currency Exchange Speculation Skill: Analytical 35) Andrea who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for Cujoli is a the Japanese yen is 129.87/$ and the 6-month forward rate is 128.53/$. Andrea would earn a higher currency rate of return by buying yen and a forward contract than if she had invested her money in 6-month US speculator Treasury securities at an annual rate of 2.50%. Register to View Answer Topic: Forward Rate Skill: Analytical 36) The gain for the purchaser of a call option contract is ________ while the maximum loss is ________. maximum A) unlimited; the premium paid B) the premium C) paid; unlimited unlimited; D) unlimited unlimited; the value of the underlying asset Register to View Answer Topic: Currency Options Skill: Conceptual 37) Most option profits and losses are realized through taking actual delivery of the currency rather than offsetting contracts. Register to View Answer Topic: Currency Options Skill: Conceptual 38) The buyer of a long call option 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 an D) unlimited maximum gain potential. all of the above. Register to View Answer Topic: Currency Options Skill: Conceptual 39) Which of the following is NOT true for the writer of a call option? A) The maximum loss is unlimited. B) The maximum gain is unlimited. C) The gain or loss is equal to but of the opposite sign of the buyer of a call option. D) All of the above are true. Register to View Answer Topic: Currency Options Skill: Conceptual 40) Which of the following is NOT true for the writer of a put option? A) The maximum loss is limited to the strike price of the underlying asset less the premium. B) The gain or loss is equal to but of the opposite sign of the buyer of a put option. C) The maximum gain is the amount of the premium. D) All of the above are true. Register to View Answer Topic: Currency Options Skill: Conceptual 41) The buyer of a long put option 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. Register to View Answer Topic: Currency Options Skill: Conceptual 42) The value of a European style call option is the sum of two components, the A) present value B) plus the intrinsic value. time value plus the present value. C) intrinsic value plus the time value. D) the intrinsic value plus the standard deviation. Register to View Answer Topic: Currency Options Skill: Recognition 43) Which of the following is NOT a factor in determining the premium price of a currency option? A) the present spot rate B) the time to C) maturity the standard D) deviation of the daily spot price movement All of the above are factors in determining the premium price. Register to View Answer Topic: Currency Options Pricing Skill: Recognition 44) The of an option is the value if the option were to be exercised immediately. It is the options ________ value. ________ A) intrinsic value; maximum B) intrinsic value; minimum C) time value; D) maximum time value; minimum Register to View Answer Topic: Currency Options Intrinsic Value Skill: Recognition 45) Assume that a call option has an exercise price of $1.50/. At a spot price of $1.45/, the call option has ________. A) a time value of $0.04 B) a time value of $0.00 C) an intrinsic D) value of $0.00 an intrinsic value of -$0.04 Register to View Answer Topic: Currency Options Intrinsic Value Skill: Analytical 46) The time asymmetric in value as you move away from the strike price. (I.e., the time value at two cents above the value is strike price is not necessarily the same as the time value two cents below the strike price.) Register to View Answer Topic: Currency Options Time Value Skill: Conceptual 47) Other things equal, the price of an option goes up as the volatility of the option decreases. Register to View Answer Topic: Currency Options Volatility Skill: Conceptual 48) Volatility directly observed for calculation purposes of the option pricing model. Therefore, it may be determined cannot be from A) historic B) volatility. forwardC) looking volatility. implied D) volatility. any of the above. Register to View Answer Topic: Currency Options Volatility Skill: Recognition 49) Volatilitie only judgmental aspect of currency option pricing and are therefore, the least important component s are the therein. Register to View Answer Topic: Currency Options Volatility Skill: Conceptual 50) ________ volatility are calculated by being backed out of the market option premium values traded. A) Historic B) ForwardC) looking Implied D) None of the above Register to View Answer Topic: Currency Options Volatility Skill: Recognition 51) Dash ure works for the currency trading unit of ING Bank in London. He speculates that in the coming months Brevensh the dollar will rise sharply vs. the pound. What should Dash do to act on his speculation? A) Buy a call on B) the pound. Sell a call on C) the pound. Buy a put on D) the pound. Sell a put on the pound. Register to View Answer Topic: Options Market Skill: Conceptual 52) A put yen is written with a strike price of 105.00/$. Which spot price maximizes your profit if you choose to option on exercise the option before maturity? A) 100/$ B) 105/$ C) 110/$ D) 115/$ Register to View Answer Topic: Options Market Skill: Conceptual 53) A call euros is written with a strike price of $1.30/euro. Which spot price maximizes your profit if you choose option on to exercise the option before maturity? A) $1.20/euro B) $1.25/euro C) $1.30/euro D) $1.35/euro Register to View Answer Topic: Options Market Skill: Conceptual 54) A call UK pounds has a strike price of $2.05/ and a cost of $0.02. What is the break-even price for the option? option on A) $2.03/ B) $2.07/ C) $2.05/ D) The answer depends upon if this is a long or a short call option. Register to View Answer Topic: Call Option Skill: Analytical 55) Your U.S an accounts payable denominated in UK pounds due in 6 months. To protect yourself against firm has unexpected changes in the dollar/pound exchange rate you should A) buy a pound put option. B) sell a pound put option. C) buy a pound D) call option. sell a pound call option. Register to View Answer Topic: Call Option Skill: Conceptual 8.2 Essa y Que stio ns 1) Why are currency futures contracts more popular with individuals and banks while foreign currency forwards are foreign more popular with businesses? 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. 2) Compare contrast foreign currency options and futures. Identify situations when you may prefer one vs. the other and when speculating on foreign exchange. Answer: Foreign currency futures are derivative securities that allow the holder to lock in a price today for another currency at some point in the future. The foreign currency future contract is an obligation on the part of the parties to fulfill the terms of the contract. Even if prices change in an unanticipated way, the parties are obligated to fulfill the terms of the contract. The foreign currency option contract on the other hand is a right not an obligation to purchase/sell a currency at some point in the future at a price agreed upon today. If prices change in an unexpected manner, the buyer of the contract is under no obligation to exercise the contract. Option contracts are better suited to situations where price changes are anticipated, but the direction of the change is highly uncertain.

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Victoria BerahmandpourAccounting FI515Date: 03/30/2012Project Week 5(11-7) New-Project AnalysisYou have been asked by the president of your company to evaluate the proposedacquisition of a new spectrometer for the firms R&D department. Theequipment
Keller Graduate School of Management - FI - 515
Victoria BerahmandpourAccounting FI515Date: 04/10/2012Project Week 7(13-10) Corporate ValuationThe financial statements of Lioi Steel Fabricators are shown belowboth the actual resultsfor 2010 and the projections for 2011. Free cash flow is expected
Keller Graduate School of Management - FI - 515
GradingSummaryThesearetheautomaticallycomputedresultsofyourexam. DateTaken:Gradesforessayquestions,andcommentsfromyour TimeSpent:instructor,areinthe"Details"sectionbelow.PointsReceived:QuestionType:02secs36/36(100%)#OfQuestions:MultipleChoice3/
Keller Graduate School of Management - FI - 515
GradingSummaryThesearetheautomaticallycomputedresultsofyourexam. DateTaken:Gradesforessayquestions,andcommentsfromyour TimeSpent:instructor,areinthe"Details"sectionbelow.PointsReceived:QuestionType:#OfQuestions:MultipleChoice3/5/2012036secs30/3
Keller Graduate School of Management - FI - 515
GradingSummaryThesearetheautomaticallycomputedresultsofyourexam. DateTaken:Gradesforessayquestions,andcommentsfromyour TimeSpent:instructor,areinthe"Details"sectionbelow.PointsReceived:QuestionType:#OfQuestions:MultipleChoice3/22/201237secs30/3
Keller Graduate School of Management - FI - 515
aretheautomaticallycomputedresultsofyourexam.Gradesforessayquestions,andcommentsfromyour instructor,areinthe"Details"sectionbelow.3/23/2012DateTaken:TimeSpent:33min,02secsPointsReceived:30/30(100%)QuestionType:#OfQuestions:MultipleChoice5#Cor
Keller Graduate School of Management - FI - 515
1.Question:Whichofthefollowingstatementsisincorrect?StudentAnswer:Assumingaprojecthasnormalcashflows,theNPVwillbepositiveiftheIRRislessthanthanthecostofcapital.IfthemultipleIRRproblemdoesnotexist,anyindependentprojectacceptablebytheNPVmethodw
Keller Graduate School of Management - FI - 515
Week 6 : Financial Planning, Forecasting Financial Statements, Corporate Valuation,Value-Based Management, and Corporate Governance - Self Quiz1.YouworkforAthensInc.andyoumustestimatetheYear1operatingcashflowforaprojectwiththe followingdata.WhatistheYe
Keller Graduate School of Management - FI - 515
GradeDetails1.Question:Otherthingsheldconstant,whichofthefollowingwillcausean increaseinworkingcapital?StudentAnswer:Cashisusedtobuymarketablesecurities.Acashdividendisdeclaredandpaid.Merchandiseissoldataprofit,butthesaleisoncredit.Longtermbo
Keller Graduate School of Management - FI - 515
TaxRateGuidefor2010and2011StandardMileageRates20101/16/30/117/112/31/1150.0centsper 51.0centspermilemile55.5centspermileCharitable14.0centsper 14.0centspermilemile14.0centspermileMedicalandMoving16.5centsper 19.0centspermilemile23.5ce
Keller Graduate School of Management - FI - 515
FCF:Step One: Using the Income Statement data- estimate NOPATStep Two: Using the Balance Sheet data- estimate Net Operating Working Capital (NOWC)Step Three: Using the Balance Sheet Data estimate Total Net Operating CapitalStep Four: Net Investment in
Keller Graduate School of Management - FI - 515
CAPITAL BUDGETING ANALYSISCapital budgeting analysis is a process used to evaluate potential projects a company may choose as investments. Key methods used in capitalbudgeting include NPV, IRR, MIRR, PI, payback, and discounted payback.In the following
GA Southern - ACCT - 3231
ACCT 3231The statement of cash flows may be presented using the direct method. Thedirect method calculates the cash received and paid for operating, investing, andfinancing activities. A supplemental reconciliation begins with net income andadjusts ne
GA Southern - ACCT - 3231
ACCT 3231A summary of significant accounting policies is a required disclosure. Typicalaccounting policies that are disclosed in the notes to the financial statementsinclude: depreciation method used, inventory valuation method used, basis ofconsolida
GA Southern - ACCT - 3231
ACCT 3231A stock option plan is designed to encourage management to meet companygoals by providing an incentive. The incentive may be measured by thedifference between the exercise price per share and the market price per share.Stock purchase plans pe
GA Southern - ACCT - 3231
ACCT 3231Reporting the effects of inflation is a controversial and complex area ofaccounting. If the economy experiences high rates of inflation in the future,efforts to reflect the impact of inflation directly in the financial statements arelikely to
GA Southern - ACCT - 3231
ACCT 3231The format of the independent auditors report contains four paragraphs:introductory, scope, opinion, and internal control effectiveness, a newly requiredparagraph.o The introductory paragraph describes the financial statements audited andsta
GA Southern - ACCT - 3231
ACCT 3231Equivalent units are defined as the product of the number of partially completedunits and the percentage of completion of those units.Equivalent units need to be calculated because a department usually has somepartially completed units in its
GA Southern - ACCT - 3231
ACCT 3231The FIFO method removes the equivalent units that were already in beginninginventory from the equivalent units as defined using the weighted-averagemethod. Thus, the FIFO method isolates the equivalent units due to workperformed during the cu
GA Southern - ACCT - 3231
ACCT 3231Common examples of variable costs are:o Merchandising companies cost of goods sold.o Manufacturing companies direct materials, direct labor, and variableoverhead.o Merchandising and manufacturing companies commissions, shippingcosts, and cl
GA Southern - ACCT - 3231
ACCT 3231The trend in many industries is toward greater fixed costs relative to variablecosts. For example: H&R Block employees used to fill out tax returns forcustomers by hand. Now, computer software is used to complete tax returns.Safeway and Kroge
GA Southern - ACCT - 3231
ACCT 3231In account analysis, each account under consideration is classified as variable orfixed based on the analysts prior knowledge about how costs behave. Thisapproach is limited in value in the sense that it glosses over the fact that someaccount
UCSB - CHEM - 109a
CHEMISTRY 109AFall 2012Instructor:Paula Yurkanis BruiceText: "Organic Chemistry", 6th edition by P. Y. Bruice"Solutions Manual and Study Guide", 6th edition by P. Y. Bruice(do not purchase the Klein book)WEB sites:http:/www.chemplace.comThe acces
UCSB - CHEM - 109a
CHEMISTRY 109CSpring 2013Instructor:Paula Yurkanis BruiceText: "Organic Chemistry", 6th edition by P. Y. Bruice"Solutions Manual and Study Guide", 6th edition by P. Y. BruiceWEB sites:http:/www.chemplace.comClick on the picture of the 6th edition.
UCSB - MCDB - 101B
MCDB 101B Spring 2012 MIDTERM 1 EXAM KEY1. (20 pts) Maple syrup urine disease is a metabolic genetic disorder that is characterized by a distinctivesweet odor in an infants urine. If untreated, it can lead to seizures, coma, and death. The biochemicald