FIN 6420 CH 5 EXAM QUESTIONS ANSWERED CORRECTLY LATEST UPDATE 2026

FIN 6420 CH 5 EXAM QUESTIONS ANSWERED CORRECTLY LATEST UPDATE 2026 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 $100,000 forward in three months. the spot rate of the euro on September 1 is $1.15. Graylon will receive ____ for the euros. a. 220,000 b. 230,000 c. 200,000 d. 224,000 - Answers $220,000 As mentioned in the text, the most common maturities for forward rates are: a. 30, 60, 90, 180, and 360 days b. one, three, six, and twelve years c. 5, 30, and 360 days d. two, three, and five weeks - Answers 30, 60, 90, 180, and 360 days A speculator in futures contacts who expects the value of a foreign currency to depreciate would likely sell futures contracts. T/F? - Answers TRUE Assume that the British pound futures price for September is $1.60. Given that 62,500 units are in a British pound futures contract, the seller of British pound futures will receive ____ on the delivery date a. 39,062.5 b. 100,000.00 c. 48,000 d. 87,062.5 - Answers $100,000 Forward contracts contain a. a commitment to the owner, and are standardized b. a commitment to the owner, and can be tailored to the owner's desire c. a right but not a commitment to the owner, and can be tailored to the owner's desire d. a right but not a commitment to the owner, and are standardized - Answers A commitment to the owner, and can be tailored to the owner's desire 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. premium; 1.9 b. premium; 1.8 c. discount; 1.9 d. discount; 1.8 - Answers Discount; 1.8 Which of the following is true for futures, but not for forwards? a. Actual Delivery b. No transaction costs c. Self-regulating market d. None of these are correct - Answers None of these are correct Which of the following is NOT true regarding futures contracts? a. unlike forward contracts, they are generally traded on an exchange b. futures contracts are standardized with respect to delivery date and size of the contract c. there is an active over-the-counter market for currency futures contracts d. currency futures can be used by speculators who attempt to profit from exchange rate movements - Answers There is an active over-the-counter market for currency futures contracts The spot rate of the euro is quoted at $1.29. the annualized forward premium on the euro is 10 %. What is the 30-day forward rate of the euro? a. $1.30 b. $1.42 c. $1.28 d. $1.16 - Answers $1.30 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 being equal. a. greater; greater b. lower; lower c. greater; lower d. lower; greater - Answers Lower; lower If you expect the euro to depreciate, it would be appropriate to ____ for speculative purposes. a. buy a euro call and buy a euro put b. buy a euro call and sell a euro put c. sell a euro call and buy a euro put d. sell a euro call and sell a euro put - Answers Sell a euro call and buy a euro put Forward contracts are usually liquidated by actual delivery of the currency, while futures contracts are usually liquidated by offsetting transactions. T/F? - Answers TRUE If the futures rate is above the forward rate, actions by rational investors would put upward pressure on the forward rate and downward pressure on the futures rate. T/F? - Answers TRUE If an investor who has previously purchased a futures contract wishes to liquidate her position, she would sell an identical futures contact with the same settlement date. T/F? - Answers TRUE When the futures price on euros is below the forward rate on euros for the same settlement date, astute investors may attempt to simultaneously ____ euros forward and ____ euro futures. a. sell; sell b. buy; sell c. sell; buy d. buy; buy - Answers Sell; buy Currency futures can be used by MNC's to hedge payables. That is, an MNC would ____ futures to hedge a foreign payable position. Also, currency futures can be used for speculation. For example, a speculator expecting a currency to appreciate would ____ futures. a. buy; buy b. sell; sell c. buy; sell d. sell; buy - Answers Buy; buy A forward rate for a currency is said to exhibit a discount if: a. the forward rate exceeds the existing spot rate b. the forward rate exceeds the expected future spot rate c. the forward rate is less than the expected future spot rate d. the forward rate is less than the existing spot rate - Answers The forward rate is less than the existing spot rate When the futures price is above the forward rate, astute investors may attempt to simultaneously buy a currency forward and sell futures in that currency. These actions would place ____ pressure on the forward rate and ____ pressure on the futures rate. a. upward; downward b. upward; upward c. downward; upward d. downward; downward - Answers Upward; downward Which of the following is true: a. both the futures market and the forward market are primarily used for speculating b. the futures market is primarily used for hedging while the forward market is used for speculating c. the futures market is used for both hedging and speculating while the forward market is primarily used for speculating d. the futures market is used for both hedging and speculating while the forward market is primarily used for hedging - Answers The futures market is used for both hedging and speculating while the forward market is primarily used for hedging Which of the following does not represent the risk from using forward contracts: a. a forward contract is used to hedge receivables, and the spot exchange rate at the expiration of the contract exceeds the contract price b. a forward contract is used to hedge receivables, and the spot exchange rate at the time of expiration of the contract is lower than the contract price c. a forward contract is used to hedge payables, and the spot exchange rate at the time of expiration of the contract is lower than the contract price d. a forward contract is used to hedge payables or receivables, and the amount to be received or paid is canceled - Answers A forward contract is used to hedge receivables, and the spot exchange rate at the time of expiration of the contract is lower than the contract price If the spot rate of the British pound is $1.50, and the one-year forward rate has a discount of 3 percent, the one-year forward rate is $____. a. 1.47 b. 1.50 c. 1.46 d. 1.55 - Answers $1.46 A firm sells a currency futures contract, and then decides before settlement date that it no longer wants to maintain such a position. it can close out its position by: a. selling an identical futures contract b. selling a futures contract for a different amount of currency c. buying a futures contract with a different settlement date d. buying an identical futures contract - Answers Buying an identical futures contract 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. 7.6 % premium b. 1.9 % premium c. 1.9 % discount d. 7.6 % discount - Answers 7.6% premium Frank is an option speculator. He anticipates the Danish kroner to appreciate from its current level of $.19 to $.21. Currently, kroner call options are available with an exercise price of $.18 and a premium of $.02. Should Frank attempt to buy this option? If the future spot rate of the Danish kroner is indeed $.21, what is his profit or loss per unit? a. yes; .03 b. yes; .01 c. no; -.01 d. yes; -.01 - Answers Yes; $.01 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 $.78 on the expiration date, your net profit per unit is: a. -.08 b. .08 c. -.05 d. .05 - Answers -$.05 Which of the following is NOT true regarding currency options? a. similar to futures contracts, margin requirements are normally imposed on option traders b. currency options can be classified as either put or call options c. options are traded on exchanges, never over-the-counter d. although commissions for options are fixed per transaction, multiple contracts may be involved in a transaction, thus lowering the commission per contract - Answers Options are traded on exchanges, never over-the-counter A call option premium has a lower bound that is equal to the greater of zero and the difference between the underlying ____ prices. The upper bound of a call option premium is the ____ price. a. spot and exercise; exercise b. spot and exercise; spot c. exercise and spot; exercise d. exercise and spot; spot - Answers Spot and exercise; spot A US corporation has purchased currency call options to hedge a 70,000 pound payable. the premium is $.02 and the exercise price of the option is $.50. If the spot rate at the time of maturity is $.65, what is the total amount paid by the corporation if it acts rationally? a. 36,400 b. 46,900 c. 33,600 d. 44,100 - Answers $36,400 You purchase a call option on pounds for a premium of $.03 per unit, with an exercise price of $1.64. The option will not be exercised until the expiration date, if at all. If the spot rate on the expiration date is $1.65, your net profit per unit is: a. .02 b. -.01 c. -.03 d. -.02 - Answers -$.02 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; purchasing b. purchasing; purchasing c. purchasing; selling d. selling; selling - Answers Selling; selling European currency options can be exercised ____; American currency options can be exercised ____ a. only on the expiration date; any time up to the expiration date b. only on the expiration date; only on the expiration date c. any time up to the expiration date; only on the expiration date d. any time up to the expiration date; any time up to the expiration date - Answers only on the expiration date; any time up to the expiration date Which of the following is correct? a. the higher the spot rate relative to the exercise price, the greater the value of a currency put option, other things being equal b. the lower the exercise price relative to the spot rate, the greater the value of a currency call option, other things being equal c. the longer the time to maturity, the lower the value of a currency call option, other things being equal d. the longer the time to maturity, the lower the value of a currency put option, other things being equal - Answers The lower the exercise price relative to the spot rate, the greater the value of a currency call option, other things being equal