FIN 582 Chapter 5 Exam Questions with Correct Answers

FIN 582 Chapter 5 Exam Questions with Correct Answers An option writer is the seller of a call or a put option. - Answer-True An MNC frequently uses either forward or futures contracts to hedge its exposure to foreign receivables. To do so, the MNC can either sell the foreign currency forward or sell futures. - Answer-False Hedgers should buy puts if they are hedging an expected inflow of foreign currency. - Answer-True The lower bound of the call option premium is the greater of zero and the difference between the spot rate and the exercise price; the upper bound of a currency call option is the spot rate. - Answer-True 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. - Answer-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. - Answer-True Margin requirements are deposits placed by investors in futures contracts with their respective brokerage firms when they take their position. They are intended to minimize credit risk associated with futures contracts. - Answer-True A European option can only be exercised at the expiration date, while an American option can be exercised any time prior to the expiration date. - Answer-True Forward contracts are usually liquidated by actual delivery of the currency, while futures contracts are usually liquidated by offsetting transactions. - Answer-True If an investor who previously sold futures contracts wishes to liquidate his position, he could sell futures contracts with the same maturity date. - Answer-True 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. - Answer-True Managers of MNCs are typically expected to use currency derivatives for speculation in order to improve profits. - Answer-False The writer of a put option has a right, but not obligation, to buy the underlying currency from the option buyer - Answer-False A straddle can only be achieved if the exercise prices of put and call options are the same. - Answer-True Forward contracts are usually negotiated with a commercial bank, while futures contracts are traded on an organized exchange. - Answer-True