tb07 - Kirt C Butler Multinational Finance 3rd edition...

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Kirt C. Butler, Multinational Finance , 3 rd edition Chapter 7 Currency Options and Options Markets True/False 1. In option contracts, one side has the obligation to perform if the other side forces the exchange. In futures contracts, both sides have the obligation to perform. ANS: True. 2. A currency put option is the right to sell the underlying currency at a specified price and within a specified period. ANS: True. 3. A currency call option is the right to sell the underlying currency at a specified price and within a specified period. ANS: False. It is the right to buy. 4. When you sell a put option on euros, you incur an obligation to buy euros at the option of the purchaser of the contract. ANS: True. 5. A short put on pounds (for dollars) is equivalent to a long call on dollars (for pounds). ANS: False. The option writer has an obligation to sell pounds and to buy dollars. 6. A foreign currency put option writer has the obligation to sell the underlying currency to the put option holder should the option be exercised. ANS: False. The writer has the obligation to buy from the put option holder. 7. The holder of a currency call option has the right to buy one currency with another currency at the contract’s exercise price. ANS: True. 8. An option to buy pounds at a price of K $/£ is equivalent to an option to sell dollars at K £/$ = 1/K $/£ . ANS: True. 9. Currency options are traded only at organized options exchanges, such as the International Monetary Market of the Chicago Mercantile Exchange. ANS: False. Over-the-counter options are also traded through commercial and investment banks. 10. Over-the-counter currency options are standardized to provide added liquidity. ANS: False. They are often customized to fit the needs of a particular client. 11. There is an active over-the-counter market in currency options operated by large commercial and investment banks. ANS: True. 12. The deliverable asset of a currency option is the currency being bought or sold. ANS: True. 13. Currency options on spot and on futures prices are essentially equivalent in their ability to hedge currency risk. 50
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Kirt C. Butler, Multinational Finance , 3 rd edition ANS: True. 14. Volatility on spot exchange rates is much less than volatility on forward exchange rates. ANS: False. Volatilities on spot and forward currencies are similar. 15. There is little relation between currency spot and futures price volatilities. ANS: False. Spot and futures price volatilities are similar. 16. American options are exercisable any time until expiration. ANS: True. 17. European options are exercisable any time until expiration. ANS: False. They can be exercised only at expiration. 18. There is often an imbalance between the number of currency option contracts that are bought and sold on currency option exchanges. ANS: False. The number of contracts bought must equal the number sold.
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This note was uploaded on 12/07/2011 for the course FINS 3616 taught by Professor Curry during the One '10 term at University of New South Wales.

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tb07 - Kirt C Butler Multinational Finance 3rd edition...

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