tb06[1] - Kirt C. Butler, Multinational Finance, 3rd...

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Kirt C. Butler, Multinational Finance , 3 rd edition PART V Derivative Securities for Currency Risk Management Chapter 6 Currency Futures and Futures Markets True/False 1. A foreign currency futures contract is a commitment to exchange a specified amount of one currency for a specified amount of another currency at a specified time in the future. ANS: True. 2. A foreign currency futures contract is a commitment to exchange a specified amount of one currency for another currency at a specified time in the future using the actual spot rate on that future date. ANS: False. If you want to exchange currency at the actual spot rate, simply wait until that date. 3. A currency futures contract is closer in function to a currency option contract than to a currency forward contract. ANS: False. Currency futures are similar in function to forward contracts. 4. The choice between a currency forward or futures contract depends on whether the instrument is to be used for hedging or for speculation. ANS: False. The choice depends on the tradeoffs between flexibility, liquidity, cost, and price. 5. Exchange-traded currency futures contracts are customized to fit the needs of individual clients. ANS: False. Exchange-traded futures contracts are highly standardized instruments. 6. Changes in the underlying spot rate of exchange are settled daily in a futures contract whereas they are settled at maturity in a forward contract. ANS: True. 7. A major problem with a currency forward contract is that one party always has an incentive to default when the actual spot rate diverges from the contract price. ANS: True. 8. If the closing spot rate is $0.5800/C$ at the expiration of a forward contract, the party that has sold C$ at a forward rate of $0.5754/C$ has an incentive to default. ANS: True. 9. If the closing spot rate is $0.5800/C$ at the expiration of a forward contract, a party that has sold dollars at a forward rate of $0.5754/C$ has an incentive to default. ANS: False. This price is profitable for the short dollar (long C$) forward position. 10. Forward contracts are marked-to-market daily. ANS: False. Futures contracts are marked-to-market daily. 11. Initial and maintenance margins are required on currency futures contracts. ANS: True. 12. If an investor cannot meet a margin call, the exchange clearinghouse subtracts the amount due from the margin account and closes out the futures contract. 43
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Kirt C. Butler, Multinational Finance , 3 rd edition ANS: True. 13. If one of the parties to a futures contract defaults, it is the clearinghouse that usually bears the loss. ANS: False. The broker initiating the trade (the registered futures merchant) must bear any loss. 14. Standardization in currency futures contracts increases liquidity and marketability, but reduces their flexibility relative to forward contracts.
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This note was uploaded on 10/10/2011 for the course FI 451 taught by Professor Staff during the Spring '08 term at Michigan State University.

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tb06[1] - Kirt C. Butler, Multinational Finance, 3rd...

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