Answers to End of Chapter 5 Questions

Answers to End of Chapter 5 Questions - Answers to End of...

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Answers to End of Chapter 5 Questions 1. Forward versus Futures Contracts. Compare and contrast forward and futures contracts. ANSWER: Because currency futures contracts are standardized into small amounts, they can be valuable for the speculator or small firm (a commercial bank’s forward contracts are more common for larger amounts). However, the standardized format of futures forces limited maturities and amounts. 2. Using Currency Futures. a. How can currency futures be used by corporations? ANSWER: U.S. corporations that desire to lock in a price at which they can sell a foreign currency would sell currency futures. U.S. corporations that desire to lock in a price at which they can purchase a foreign currency would purchase currency futures. b. How can currency futures be used by speculators? ANSWER: Speculators who expect a currency to appreciate could purchase currency futures contracts for that currency. Speculators who expect a currency to depreciate could sell currency futures contracts for that currency. 3. Currency Options. Differentiate between a currency call option and a currency put option. ANSWER: A currency call option provides the right to purchase a specified currency at a specified price within a specified period of time. A currency put option provides the right to sell a specified currency for a specified price within a specified period of time. 4. Forward Premium. Compute the forward discount or premium for the Mexican peso whose 90-day forward rate is $.102 and spot rate is $.10. State whether your answer is a discount or premium. ANSWER: (F - S) / S =($.098 - $.10) / $.10 × (360/90) = –.02, or –2%, which reflects a 8% discount 5. Effects of a Forward Contract. How can a forward contract backfire? ANSWER: If the spot rate of the foreign currency at the time of the transaction is worth less than the forward rate that was negotiated, or is worth more than the forward rate that was negotiated, the forward contract has backfired.
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6. Hedging With Currency Options. When would a U.S. firm consider purchasing a call option on euros for hedging? When would a U.S. firm consider purchasing a put option on euros for hedging? ANSWER: A call option can hedge a firm’s future payables denominated in euros. It effectively locks in the maximum price to be paid for euros. A put option on euros can hedge a U.S. firm’s future receivables denominated in euros. It effectively locks in the minimum price at which it can exchange euros received. 7. Speculating With Currency Options. When should a speculator purchase a call option on Australian dollars? When should a speculator purchase a put option on Australian dollars? ANSWER: Speculators should purchase a call option on Australian dollars if they expect the Australian dollar value to appreciate substantially over the period specified by the option contract. Speculators should purchase a put option on Australian dollars if they expect the Australian
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This note was uploaded on 10/07/2010 for the course FIN 4173N taught by Professor Spencer during the Spring '10 term at Dowling.

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Answers to End of Chapter 5 Questions - Answers to End of...

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