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Exam 5: Currency Derivatives

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Question 31

Multiple Choice

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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

E) B) and C)
F) None of the above

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Question 32

Multiple Choice

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​When currency options are not standardized and are traded over-the-counter, there is ____ liquidity and a ____ bid/ask spread.

A) ​less; narrower
B) ​more; narrower
C) ​more; wider
D) ​less; wider

E) A) and D)
F) C) and D)

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Question 33

Multiple Choice

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​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 being equal.

Research has found that the options market is:

Which of the following is not true regarding currency options?

Options can be traded on an exchange or over the counter.

Which of the following is true regarding the currency options market?

​A put option on British pounds has a strike (exercise) price of $1.48. The present exchange rate is $1.55. This put option can be referred to as:

Assume that a speculator received news that makes her believe that the yen will appreciate or depreciate substantially in the near future, but she is not certain of the direction. Also assume that the exercise prices of call and put options are the same. The most appropriate method for speculation is a ____and it may be achieved by ____.

If an investor who has previously purchased a futures contract wishes to liquidate her position, she would sell an identical futures contract with the same settlement date.

​Crown Co. is expecting to receive 100,000 British pounds in one year. Crown expects the spot rate of the British pound to be $1.49 in a year, so it decides to avoid exchange rate risk by hedging its receivables. The spot rate of the pound is quoted at $1.51. The strike price of put and call options are $1.54 and $1.53, respectively. The premium on both options is $.03. The one-year forward rate exhibits a 2.65 percent premium. Assume there are no transaction costs. What is the best possible hedging strategy and how many U.S. dollars Crown Co. will receive under this strategy?

If an actual put option premium is less than what is suggested by the put-call parity relationship, arbitrage can be conducted.

An advantage of a short straddle is that it provides the option writer with income from two separate sources.

The spot rate of the euro is quoted at $1.29. The annualized forward premium on the euro is 10 percent. What is the 30-day forward rate of the euro?

A high spot price relative to the strike price will result in a relatively high premium for a call option and a relatively high premium for a put option.

You are a speculator who sells a put option on Canadian dollars for a premium of $.03 per unit, with an exercise price of $.86. The option will not be exercised until the expiration date, if at all. If the spot rate of the Canadian dollar is $.78 on the expiration date, your net profit per unit is:

​Macomb Corporation is a U.S. firm that invoices some of its exports in Japanese yen. If it expects the yen to weaken, it could ____ to hedge the exchange rate risk on those exports.

The lower bound of a put option premium is the greater of zero and the difference between the exercise price and the spot rate; the upper bound of a currency put option is the exercise price.

The premium of a currency put option should increase if:

​A call option on Australian dollars has a strike (exercise) price of $.56. The present exchange rate is $.59. This call option can be referred to as: