International Financial Management Study Set 9

Forward contracts:

The writer of a call option is obligated to sell the underlying currency to the buyer of the option if the option is exercised.

A call option on Australian dollars has a strike (exercise) price of £0.40. The present exchange rate is £0.43. This call option can be referred to as:

The one-year forward rate of the British pound is quoted at $1.20, and the spot rate of the British pound is quoted at $1.23. The forward ____ is ____ percent.

If you purchase a straddle on euros, this implies that you:

There are no transactions costs associated with trading futures or options.

Which of the following is not an instrument used by MNCs to cover their foreign currency positions?

Due to put-call parity, we can use the same formula to price calls and puts.

You purchase a call option on dollars for a premium of £0.02 per unit, with an exercise price of £0.57; the option will not be exercised until the expiration date, if at all. If the spot rate on the expiration date is £0.58, your net profit per unit is:

If you have bought the right to sell, you are a:

You are a speculator who sells a call option on Swiss francs for a premium of £0.04, with an exercise price of £0.42. The option will not be exercised until the expiration date, if at all. If the spot rate of the Swiss franc is £0.47 on the expiration date, your net profit per unit, assuming that you have to buy Swiss francs in the market to fulfil your obligation, is:

Since futures contracts are traded on an exchange, the exchange will always take the "other side" of the transaction in terms of accepting the credit risk.

Carl is a US option writer. In anticipation of a depreciation of the British pound from its current level of $1.50 to $1.45, he has written a call option with an exercise price of $1.51 and a premium of $.02. If the spot rate at the option's maturity turns out to be $1.54, what is Carl's profit or loss per unit (assuming the buyer of the option acts rationally)?

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.

If you expect the euro to depreciate, it would be appropriate to ____ for speculative purposes.

A Collar is more flexible than futures and forwards allowing limited gains if there is a favourable price movement and it is cheaper than an option as potential gains are limited.

The price of a futures contract will generally vary significantly from that of a forward contract.

Forward contracts are usually liquidated by actual delivery of the currency, while futures contracts are usually liquidated by offsetting transactions.

If your firm expects the euro to substantially depreciate, it could speculate by ____ euro call options or ____ euros forward in the forward exchange market.

When you own ____, there is no obligation on your part; however, when you own ____, there is an obligation on your part.