Bus 426 test

# Bus 426 test - Name You have 1 hour and 15 minutes to...

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Name _____________________ Midterm #2 March 3, 2011 BUS 426 You have 1 hour and 15 minutes to complete the exam. Good luck!

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Section I: Multiple Choice (1.5 points each) Please clearly circle the most correct answer: 1. Today, you buy a call option on Egyptian Pounds that expires on May 1. This afternoon interest rates in Egypt increase. Assuming that all other variables remain the same, including American interest rates; then we expect: _______________. a. the value of your call option will increase b. the value of your call option will decrease c. the value of your call option will remain the same d. the change in value depends on whether the call option is American style, or European style e. the change in value depends on whether the option is in the money or out of the money f. d and e 2. If the volatility of the underlying asset (currency) increases, then the _________. a. the value of call options will increase b. the value of call options will decrease c. the value of call options will increase only if the option is in the money d. the value of call options will decrease only when the option is near the expiration date e. it depends on whether the call option is American style, or European style f. the value of call and put options will both remain the same g. c and d h. c, d, and e 3. Suppose that you are offered a one-year loan at an interest rate of 6.25% and you expect that the inflation rate will be 3.50% over the next year. What is the real interest rate that you are paying? a. 2.588% b. 2.657% c. 2.750% d. 9.750% e. 9.969% f. 97.412%
4. The spot rate on the pound is \$1.80 and the 180-day forward rate is \$1.74. The difference between the two rates means that we know for sure that (assume that IRP and FEP hold): a. nominal interest rates are higher in Britain relative to the US

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Bus 426 test - Name You have 1 hour and 15 minutes to...

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