Multiple Choice
Identify the
choice that best completes the statement or answers the question.
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1.
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Kalons ltd. is a UK-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. |
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2.
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Which of the following is the most likely strategy for a UK 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 the above are
appropriate strategies for the scenario described. |
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3.
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Which of the following is true?
a. | Most forward contracts between firms and banks are for speculative
purposes. | b. | Most future contracts represent a conservative approach by firms to hedge foreign
trade. | c. | The forward contracts offered by banks have maturities for only four possible dates
in the future. | d. | none of the above |
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4.
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European currency options can be exercised _______; American currency options
can be exercised _______.
a. | any time up to the expiration date; any time up to the expiration
date | b. | any time up to the expiration date; only on the expiration date | c. | only on the
expiration date; only on the expiration date | d. | only on the expiration date; any time up to the
expiration date |
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5.
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A UK corporation has purchased currency call options to hedge a 70,000 dollar
payable. The premium is £0.015 and the exercise price of the option is £0.54. If the spot
rate at the time of maturity is £0.59, what is the total amount paid by the corporation if it
acts rationally?
a. | £36,750. | c. | £37,800. | b. | £1,050. | d. | £38,850. |
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6.
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Conditional currency options are:
a. | options that do not require premiums. | b. | options where the premiums are canceled if a
trigger level is reached. | c. | options that allow the buyer to decide what
currency the option will be settled in. | d. | none of the
above |
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7.
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Which of the following are true regarding the options markets?
a. | Hedgers and speculators both attempt to lower risk. | b. | Hedgers attempt to
lower risk, while speculators attempt to make riskless profits. | c. | Hedgers and
speculators are both necessary in order for the market to be liquid. | d. | all of the
above |
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8.
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The premium of a currency put option will increase if:
a. | the volatility of the underlying asset goes up. | b. | the time to maturity
goes up. | c. | the spot rate declines. | d. | none of the
above |
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9.
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Which of the following is true of options?
a. | The writer decides whether the option will be exercised. | b. | The writer pays the
buyer the option premium. | c. | The buyer decides if the option will be
exercised. | d. | More than one of these. |
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10.
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The purchase of a currency put option would be appropriate for which of the
following?
a. | Investors who expect to buy a foreign bond in one month. | b. | Corporations who
expect to buy foreign currency to finance foreign subsidiaries. | c. | Corporations who
expect to collect on a foreign account receivable in one month. | d. | all of the
above |
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11.
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The spot rate for the Singapore dollar is £0.320. The 30-day forward rate
is £0.325. The forward rate contains an annualized __________ of ___________%.
a. | discount; -18.75 | b. | premium; 18.75 | c. | discount;
-18.46 | d. | premium; 18.46 | e. | premium; 1.56 |
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True/False
Indicate whether the
statement is true or false.
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12.
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Currency options are only traded on exchanges. That is, there is no
over-the-counter market for options.
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