Bus 426 - exam2

Bus 426 - exam2 - Test 2A BUS 426 Name: _ March 29, 2006...

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BUS 426, Spring 2006, Test 2 1 Test 2A Name: ______________________ BUS 426 March 29, 2006 I. (@3.5) For the following multiple choice questions, choose the one best answer to each. 1. The major disadvantage of forward and futures contracts relative to options is that the forwards and futures contracts: a) Cannot protect the holder against the risk of adverse movements in exchange rates. b) Are more expensive. c) Are available only for relatively short maturities. d) Eliminate the possibility of gaining a windfall profit from favorable movements in exchange rates. e) Are available for hedging but not for speculation. 2. A firm wishes to use futures contracts to hedge a euro receivable due in one year which at the current spot rate of $1.20/€ is worth about $1.2 million. The rate being quoted for euro futures contracts for March 2007 is $1.2247/€. If euro futures contracts come in units of €125,000 each, which of the following is true? a) The firm’s best hedge is to obtain 8 contracts to buy euros for dollars one year from now. b) The firm’s best hedge is to obtain 10 contracts to buy euros for dollars one year from now. c) The firm’s best hedge is to obtain 8 contracts to sell euros for dollars one year from now. d) The firm’s best hedge is to obtain 10 contracts to sell euros for dollars one year from now. e) The firm cannot hedge with futures contracts because the contract size is too small. 3. What is the total premium on a June call option for Swiss francs if the option size is 125,000 Swiss francs, the premium per franc is 0.18 cents, the strike price is $0.83 per franc, and the current spot exchange rate is $0.7747/franc? a) $2,250.00 b) $225.00 c) $103.75 d) $22.50 e) $1,037.50 4. What is the intrinsic value of a June put option for British pounds if the option size is 62,500, the premium per pound is 1.30 cents, the strike price is $1.76 / , and the spot price at expiration is $1.7550 / ? a) $81.25 b) $812.50 c) $0 d) $312.50 e) $500.00 5. What is the net-of-premium profit or loss on a June put option for British pounds if the option size is 62,500, the premium per pound is 1.30 cents, the strike price is $1.76 / , and the spot price at expiration is $1.7550 / ? a) -$81.25 b) -$812.50 c) -$5,937.50 d) -$6,018.75 e) -$500.00 6. A rise in the domestic interest rate will a) Raise the value of foreign-currency call options and reduce the value of foreign-currency put options. b) Raise the value of foreign-currency put options and reduce the value of foreign-currency call options. c) Raise the value of both foreign-currency put and call options. d) Reduce the value of both foreign-currency put and call options. e) Have no effect on the value of either put or call options. 7.
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Bus 426 - exam2 - Test 2A BUS 426 Name: _ March 29, 2006...

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