International Financial Management 9th
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Chapter 5
Currency Derivatives
1. Kalons, Inc. is a U.S.-based MNC that frequently imports raw materials from Canada. Kalons is
typically invoiced for these goods in Canadian dollars and is concerned that the Canadian dollar will
appreciate in the near future. Which of the following is not an appropriate hedging technique under
these circumstances?
A) purchase Canadian dollars forward.
B) purchase Canadian dollar futures contracts.
C) purchase Canadian dollar put options.
D) purchase Canadian dollar call options.
ANSWER: C
2. Graylon, Inc., based in Washington, exports products to a German firm and will receive payment of
€200,000 in three months. On June 1, the spot rate of the euro was $1.12, and the 3-month forward
rate was $1.10. On June 1, Graylon negotiated a forward contract with a bank to sell €200,000
forward in three months. The spot rate of the euro on September 1 is $1.15. Graylon will receive
$_______ for the euros.
A) 224,000
B) 220,000
C) 200,000
D) 230,000
425
426 International Financial Management
ANSWER: B
SOLUTION: €200,000 × $1.10 = $220,000
3. The one-year forward rate of the British pound is quoted at $1.60, and the spot rate of the British
pound is quoted at $1.63. The forward _______ is _______ percent.
A) discount; 1.9
B) discount; 1.8
C) premium; 1.9
D) premium; 1.8
ANSWER: B
SOLUTION: (F/S) – 1 = ($1.60/$1.63) – 1 = –1.8 percent.
Chapter 5: Currency Derivatives 427
4. The 90-day forward rate for the euro is $1.07, while the current spot rate of the euro is $1.05. What
is the annualized forward premium or discount of the euro?
A) 1.9 percent discount.
B) 1.9 percent premium.
C) 7.6 percent premium.
D) 7.6 percent discount.
ANSWER: C
SOLUTION: [(F/S) – 1] × 360/90 = 7.6 percent.
5. Thornton, Inc. needs to invest five million Nepalese rupees in its Nepalese subsidiary to support
local operations. Thornton would like its subsidiary to repay the rupees in one year. Thornton would
like to engage in a swap transaction. Thus, Thornton would:
A) convert the rupees to dollars in the spot market today and convert rupees to dollars in one year
at today’s forward rate.
B) convert the dollars to rupees in the spot market today and convert dollars to rupees in one year
at the prevailing spot rate.
C) convert the dollars to rupees in the spot market today and convert rupees to dollars in one year
at today’s forward rate.
D) convert the dollars to rupees in the spot market today and convert rupees to dollars in one year
at the prevailing spot rate.
ANSWER: C
6. In the U.S., the typical currency futures contract is based on a currency value in terms of:
A) euros.
B) U.S. dollars.
C) British pounds.
D) Canadian dollars.
ANSWER: B
7. Currency futures contracts sold on an exchange:
A) contain a commitment to the owner, and are standardized.
B) contain a commitment to the owner, and can be tailored to the desire of the owner.
C) contain a right but not a commitment to the owner, and can be tailored to the desire of the owner.
D) contain a right but not a commitment to the owner, and are standardized.
ANSWER: A
428 International Financial Management
8. Currency options sold through an options exchange:
A) contain a commitment to the owner, and are standardized.
B) contain a commitment to the owner, and can be tailored to the desire of the owner.
C) contain a right but not a commitment to the owner, and can be tailored to the desire of the owner.
D) contain a right but not a commitment to the owner, and are standardized.
ANSWER: D
9. Currency options are traded through the GLOBEX system at the:
A) Chicago Board Options Exchange when the trading floor is open.
B) Chicago Mercantile Exchange when the trading floor is open.
C) Chicago Mercantile Exchange even after the trading floor is closed.
D) Philadelphia Exchange even after the trading floor is closed.
E) Chicago Board Options Exchange even after the trading floor is closed.
ANSWER: C
10. Forward contracts:
A) contain a commitment to the owner, and are standardized.
B) contain a commitment to the owner, and can be tailored to the desire of the owner.
C) contain a right but not a commitment to the owner, and can be tailored to the desire of the owner.
D) contain a right but not a commitment to the owner, and are standardized.
ANSWER: B
11. Which of the following is the most likely strategy for a U.S. firm that will be receiving Swiss francs
in the future and desires to avoid exchange rate risk (assume the firm has no offsetting position in
francs)?
A) purchase a call option on francs.
B) sell a futures contract on francs.
C) obtain a forward contract to purchase francs forward.
D) all of these are appropriate strategies for the scenario described.
ANSWER: B
12. Which of the following is the most unlikely strategy for a U.S. firm that will be purchasing Swiss
francs in the future and desires to avoid exchange rate risk (assume the firm has no offsetting
position in francs)?
A) purchase a call option on francs.
B) obtain a forward contract to purchase francs forward.
C) sell a futures contract on francs.
D) all of these are appropriate strategies for the scenario described.
ANSWER: C
Chapter 5: Currency Derivatives 429
13. If your firm expects the euro to substantially depreciate, it could speculate by _______ euro call
options or _______ euros forward in the forward exchange market.
A) selling; selling
B) selling; purchasing
C) purchasing; purchasing
D) purchasing; selling
ANSWER: A
14. When you own _______, there is no obligation on your part; however, when you own _______,
there is an obligation on your part.
A) call options; put options
B) futures contracts; call options
C) forward contracts; futures contracts
D) put options; forward contracts
ANSWER: D
15. The greater the variability of a currency, the _______ will be the premium of a call option on this
currency, and the _______ will be the premium of a put option on this currency, other things equal.
A) greater; lower
B) greater; greater
C) lower; greater
D) lower; lower
ANSWER: B
16. When currency options are not standardized and traded over-the-counter, there is _______ liquidity
and a _______ bid/ask spread.
A) less; narrower
B) more; narrower
C) more; wider
D) less; wider
ANSWER: D
17. The shorter the time to the expiration date for a currency, the _______ will be the premium of a call
option, and the _______ will be the premium of a put option, other things equal.
A) greater; greater
B) greater; lower
C) lower; lower
D) lower; greater
ANSWER: C
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