Hull_OFOD9e_MultipleChoice_Questions_and_Answers_Ch17

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Hull: Options, Futures, and Other Derivatives, Ninth Edition Chapter 17: Options on Stock Indices and Currencies Multiple Choice Test Bank: Questions with Answers 1. Which of the following describes what a company should do to create a range forward contract in order to hedge foreign currency that will be received? A. Buy a put and sell a call on the currency with the strike price of the put higher than that of the call B. Buy a put and sell a call on the currency with the strike price of the put lower than that of the call C. Buy a call and sell a put on the currency with the strike price of the put higher than that of the call D. Buy a call and sell a put on the currency with the strike price of the put lower than that of the call Answer: B The company wants to ensure that the price received for the foreign currency will be between K 1 and K 2 . It does this by buying a put option with strike price K 1 and selling a call option with strike price K 2 . 2. Which of the following describes what a company should do to create a range forward contract in order to hedge foreign currency that will be paid? The company wants to ensure that the price paid for the foreign currency will be between K 1 and K 2 . It does this by selling a put option with strike price K 1 and buying a call option with strike price K 2 . 3. What should the continuous dividend yield be replaced by when options on an exchange rate are valued using the formula for an option on a stock paying a continuous dividend yield?
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The continuous dividend yield, q , should be replaced by the foreign risk rate, r f .
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