IBUS 401 FINAL EXAM BULLINGTON
CORRECT 100%
currency options - ANSWER _________ sold through an options exchange. They grant
the buyer a right: But not the obligation, to buy or sell and are standardized
2. Forward - ANSWER contracts contain: A commitment to the owner, and can be
tailored to the desire of the owner.
a. Selling; selling - ANSWER 3. If your firm expects the euro to substantially depreciate,
it could speculate by _______ euro call options or _______euros forward in the forward
exchange market.
d. Put options; forward contracts - ANSWER 4. When you purchase ________, there is
no obligation on your part; however, when you purchase ________, there is an
obligation on your part.
Greater; greater - ANSWER 5. 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 equal.
c. Lower; lower - ANSWER The shorter the time to the expiration date for a currency
option, the _______ will be the premium of a call option, and the _______ will be the
premium of a put option, other things equal.
hedging - ANSWER futures market is primarily used by speculators while the forward
market is primarily used for __________.
Sell a euro call and buy a euro put - ANSWER If you expect the euro to depreciate, it
would be appropriate to ________ for speculative purposes. (And if you expect the euro
to appreciate what do you do?)
a. Purchasing; selling - ANSWER 10. If you expect the British pound to appreciate, you
could speculate by ________ pound call options or ________ pound put options.
currency option - ANSWER The lower the exercises price relative to the spot rate, the
greater the value of a call option.
forward - ANSWER 12. Assume no transactions costs exist for any futures or forward
contracts. The price of British pound futures with a settlement date 180 days from now
will:Be about the same as the 180-day ________rate.
,Buying an identical futures contract - ANSWER 13. A firm sells a currency futures
contract and then decides before the settlement date that it no longer wants to maintain
such a position. It can close out its position by:
Increase substantially - ANSWER 14. If the spot rate of the euro increased substantially
over a one-month period, the futures price on euros would likely ____________over
that same period.
c.
Buying franc call options. - ANSWER 15. A U.S. firm is bidding for a project needed by
the Swiss government. The firm will not know if the bid is accepted until three months
from now. The firm will need Swiss francs to cover expenses but will be paid by the
Swiss government in dollars if it is hired for the project. The firm can best insulate itself
against exchange rate exposure by:
d.
Sell futures contracts on yen - ANSWER 21. Macomb Corporation is a U.S. firm that
invoices some of its exports in Japanese yen. If it expects the yen to depreciate, it could
________ to hedge the exchange rate risk on those exports.
d.
In the money. - ANSWER . 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:
a.
Out of the money - ANSWER 23 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:
b.
c. Covered interest arbitrage - ANSWER 27 Due to ________, market forces should
realign the relationship between the interest rate differential between two countries and
the forward premium or discount on the exchange rate between their two currencies.
d. Locational arbitrage - ANSWER 28 Due to ________, market forces should realign
the spot rate of a currency among banks.
b. Triangular arbitrage - ANSWER 29 Due to ________, market forces should realign
the difference between the cross exchange rate for a currency from, say points A and B,
and the quoted rate for the same currency at point C.
, Covered interest arbitrage - ANSWER 30 If interest rate parity holds, then ________ is
not feasible.
c.
greater - ANSWER 31 In which case will locational arbitrage be most likely feasible?
Bank A's:
b. Bid price for a currency is_________ than Bank B's ask price for the currency
discount. - ANSWER 32 Assume that the interest rate for Currency X is much higher
than the U.S. interest rate. According to Interest Rate Parity Theory, the forward rate of
Currency X should:
a. Exhibit a_____
U.K. to U.S. - ANSWER 33 If interest rate is higher in the U.S. than in the U.K. and the
forward rate of the British pound is the same as its spot rate, then:
b. Arbitrage flow of funds takes place from
Downward - ANSWER 34 Assume that U.S. investors are benefiting from covered
interest arbitrage due to high interest rate on euro. Which of the following adjustments
should result from covered interest arbitrage?
b. ______ pressure on the euro's forward rate
discount - ANSWER Based on interest rate parity, the larger the degree by which the
foreign interest rate exceeds domestic interest rate, the:
a. Larger will be the forward _______ of the foreign currency.
Upward; downward - ANSWER . Assume the British interest rates are higher than U.S.
rates, and that the spot rate for the pound equals the forward rate, then covered interest
arbitrage puts ______ pressure on the pound's spot rate, and ______ pressure on the
pound's forward rate.
c.
interest rate parity (IRP), - ANSWER According to__________ the:
d. Forward rate differs from the spot rate by a sufficient amount to offset the interest
rate differential between two countries
d. Premium; decrease - ANSWER . Assume that interest rate parity (IRP) holds. The
Mexican interest rate is 5%, and the U.S. interest rate is 8%. Subsequently, the U.S.
interest rate decreases to 7%. If IRP is to continue to hold, then the peso's forward
________ will ________.
CORRECT 100%
currency options - ANSWER _________ sold through an options exchange. They grant
the buyer a right: But not the obligation, to buy or sell and are standardized
2. Forward - ANSWER contracts contain: A commitment to the owner, and can be
tailored to the desire of the owner.
a. Selling; selling - ANSWER 3. If your firm expects the euro to substantially depreciate,
it could speculate by _______ euro call options or _______euros forward in the forward
exchange market.
d. Put options; forward contracts - ANSWER 4. When you purchase ________, there is
no obligation on your part; however, when you purchase ________, there is an
obligation on your part.
Greater; greater - ANSWER 5. 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 equal.
c. Lower; lower - ANSWER The shorter the time to the expiration date for a currency
option, the _______ will be the premium of a call option, and the _______ will be the
premium of a put option, other things equal.
hedging - ANSWER futures market is primarily used by speculators while the forward
market is primarily used for __________.
Sell a euro call and buy a euro put - ANSWER If you expect the euro to depreciate, it
would be appropriate to ________ for speculative purposes. (And if you expect the euro
to appreciate what do you do?)
a. Purchasing; selling - ANSWER 10. If you expect the British pound to appreciate, you
could speculate by ________ pound call options or ________ pound put options.
currency option - ANSWER The lower the exercises price relative to the spot rate, the
greater the value of a call option.
forward - ANSWER 12. Assume no transactions costs exist for any futures or forward
contracts. The price of British pound futures with a settlement date 180 days from now
will:Be about the same as the 180-day ________rate.
,Buying an identical futures contract - ANSWER 13. A firm sells a currency futures
contract and then decides before the settlement date that it no longer wants to maintain
such a position. It can close out its position by:
Increase substantially - ANSWER 14. If the spot rate of the euro increased substantially
over a one-month period, the futures price on euros would likely ____________over
that same period.
c.
Buying franc call options. - ANSWER 15. A U.S. firm is bidding for a project needed by
the Swiss government. The firm will not know if the bid is accepted until three months
from now. The firm will need Swiss francs to cover expenses but will be paid by the
Swiss government in dollars if it is hired for the project. The firm can best insulate itself
against exchange rate exposure by:
d.
Sell futures contracts on yen - ANSWER 21. Macomb Corporation is a U.S. firm that
invoices some of its exports in Japanese yen. If it expects the yen to depreciate, it could
________ to hedge the exchange rate risk on those exports.
d.
In the money. - ANSWER . 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:
a.
Out of the money - ANSWER 23 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:
b.
c. Covered interest arbitrage - ANSWER 27 Due to ________, market forces should
realign the relationship between the interest rate differential between two countries and
the forward premium or discount on the exchange rate between their two currencies.
d. Locational arbitrage - ANSWER 28 Due to ________, market forces should realign
the spot rate of a currency among banks.
b. Triangular arbitrage - ANSWER 29 Due to ________, market forces should realign
the difference between the cross exchange rate for a currency from, say points A and B,
and the quoted rate for the same currency at point C.
, Covered interest arbitrage - ANSWER 30 If interest rate parity holds, then ________ is
not feasible.
c.
greater - ANSWER 31 In which case will locational arbitrage be most likely feasible?
Bank A's:
b. Bid price for a currency is_________ than Bank B's ask price for the currency
discount. - ANSWER 32 Assume that the interest rate for Currency X is much higher
than the U.S. interest rate. According to Interest Rate Parity Theory, the forward rate of
Currency X should:
a. Exhibit a_____
U.K. to U.S. - ANSWER 33 If interest rate is higher in the U.S. than in the U.K. and the
forward rate of the British pound is the same as its spot rate, then:
b. Arbitrage flow of funds takes place from
Downward - ANSWER 34 Assume that U.S. investors are benefiting from covered
interest arbitrage due to high interest rate on euro. Which of the following adjustments
should result from covered interest arbitrage?
b. ______ pressure on the euro's forward rate
discount - ANSWER Based on interest rate parity, the larger the degree by which the
foreign interest rate exceeds domestic interest rate, the:
a. Larger will be the forward _______ of the foreign currency.
Upward; downward - ANSWER . Assume the British interest rates are higher than U.S.
rates, and that the spot rate for the pound equals the forward rate, then covered interest
arbitrage puts ______ pressure on the pound's spot rate, and ______ pressure on the
pound's forward rate.
c.
interest rate parity (IRP), - ANSWER According to__________ the:
d. Forward rate differs from the spot rate by a sufficient amount to offset the interest
rate differential between two countries
d. Premium; decrease - ANSWER . Assume that interest rate parity (IRP) holds. The
Mexican interest rate is 5%, and the U.S. interest rate is 8%. Subsequently, the U.S.
interest rate decreases to 7%. If IRP is to continue to hold, then the peso's forward
________ will ________.
