Fundamentals of Multinational Finance, 3e (Moffett)




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Fundamentals of Multinational Finance, 3e (Moffett)

Chapter 8



Foreign Currency Derivatives

8.1



Multiple Choice and True/False Questions

1)



Financial derivatives are powerful tools that can be used by management for purposes of

A)



speculation.

B)



hedging.

C)



human resource management.

D)



A and B above.

Answer:



D

Topic:



Financial Derivatives

Skill:



Recognition

2)



A foreign currency ________ contract calls for the future delivery of a standard amount of foreign exchange at a fixed time, place, and price.

A)



futures

B)



forward

C)



option

D)



swap

Answer:



A

Topic:



Futures Contract

Skill:



Recognition

3)



Currency futures contracts have become standard fare and trade readily in the world money centers.

Answer:



TRUE

Topic:



Futures Contract

Skill:



Recognition

4)



The major difference between currency futures and forward contracts is that futures contracts are standardized for ease of trading on an exchange market whereas forward contracts are specialized and tailored to meet the needs of clients.

Answer:



TRUE

Topic:



Futures Contract

Skill:



Recognition

5)



Which of the following is NOT a contract specification for currency futures trading on an organized exchange?

A)



size of the contract

B)



maturity date

C)



last trading day

D)



All of the above are specified.

Answer:



D

Topic:



Futures Contract

Skill:



Recognition


6)



About ________ of all futures contracts are settled by physical delivery of foreign exchange between buyer and seller.

A)



0%

B)



5%

C)



50%

D)



95%

Answer:



B

Topic:



Futures Contract

Skill:



Analytical

7)



Futures contracts require that the purchaser deposit an initial sum as collateral. This deposit is called a

A)



collateralized deposit.

B)



marked market sum.

C)



margin.

D)



settlement.

Answer:



C

Topic:



Futures Contract Provisions

Skill:



Recognition

8)



A speculator in the futures market wishing to lock in a price at which they could ________ a foreign currency will ________ a futures contract.

A)



buy; sell

B)



sell; buy

C)



buy; buy

D)



none of the above

Answer:



C

Topic:



Currency Speculation

Skill:



Conceptual

9)



A speculator that has ________ a futures contract has taken a ________ position.

A)



sold; long

B)



purchased; short

C)



sold; short

D)



purchased; sold

Answer:



C

Topic:



Currency Speculation

Skill:



Recognition

10)



Peter Simpson thinks that the U.K. pound will cost $1.43/£ in six months. A 6-month currency futures contract is available today at a rate of $1.44/£. If Peter was to speculate in the currency futures market, and his expectations are correct, which of the following strategies would earn him a profit?

A)



Sell a pound currency futures contract.

B)



Buy a pound currency futures contract.

C)



Sell pounds today.

D)



Sell pounds in six months.

Answer:



A

Topic:



Currency Speculation

Skill:



Conceptual

11)



Jack Hemmings bought a 3-month British pound futures contract for $1.4400/£ only to see the dollar appreciate to a value of $1.4250 at which time he sold the pound futures. If each pound futures contract is for an amount of £62,500, how much money did Jack gain or lose from his speculation with pound futures?

A)



$937.50 loss

B)



$937.50 gain

C)



£937.50 loss

D)



£937.50 gain

Answer:



B

Topic:



Currency Futures

Skill:



Analytical

12)



Which of the following statements regarding currency futures contracts and forward contracts is NOT true?

A)



A futures contract is a standardized amount per currency whereas the forward contact is for any size desired.

B)



A futures contract is for a fixed maturity whereas the forward contract is for any maturity you like up to one year.

C)



Futures contracts trade on organized exchanges whereas forwards take place between individuals and banks with other banks via telecom linkages.

D)



All of the above are true.

Answer:



D

Topic:



Currency Futures/Forwards

Skill:



Conceptual

13)



Which of the following is NOT a difference between a currency futures contract and a forward contract?

A)



The futures contract is marked to market daily whereas the forward contract is only due to be settled at maturity.

B)



The counterparty to the futures participant is unknown with the clearinghouse stepping into each transaction whereas the forward contract participants are in direct contact setting the forward specifications.

C)



A single sales commission covers both the purchase and sale of a futures contract whereas there is no specific sales commission with a forward contract because banks earn a profit through the bid-ask spread.

D)



All of the above are true.

Answer:



D

Topic:



Currency Futures/Forwards

Skill:



Conceptual

14)



A foreign currency ________ gives the purchaser the right, not the obligation, to buy a given amount of foreign exchange at a fixed price per unit for a specified period.

A)



future

B)



forward

C)



option

D)



swap

Answer:



C

Topic:



Currency Options

Skill:



Recognition


15)



A foreign currency ________ option gives the holder the right to ________ a foreign currency whereas a foreign currency ________ option gives the holder the right to ________ an option.

A)



call, buy, put, sell

B)



call, sell, put, buy

C)



put, hold, call, release

D)



none of the above

Answer:



A

Topic:



Currency Options

Skill:



Recognition

16)



The writer of the option is referred to as the seller, and the buyer of the option is referred to as the holder.

Answer:



TRUE

Topic:



Currency Options

Skill:



Recognition

17)



The price at which an option can be exercised is called the ________.

A)



premium

B)



spot rate

C)



strike price

D)



commission

Answer:



C

Topic:



Currency Options

Skill:



Recognition

18)



An ________ option can be exercised only on its expiration date, whereas an ________ option can be exercised anytime between the date of writing up to and including the exercise date.

A)



American; European

B)



American; British

C)



Asian; American

D)



European; American

Answer:



D

Topic:



Currency Options

Skill:



Recognition

19)



A call option whose exercise price exceeds the spot rate is said to be ________.

A)



in-the-money

B)



at-the-money

C)



out-of-the-money

D)



over-the-spot

Answer:



C

Topic:



Currency Options

Skill:



Recognition


20)



A call option whose exercise price is less than the spot rate is said to be ________.

A)



in-the-money

B)



at-the-money

C)



out-of-the-money

D)



under-the-spot

Answer:



A

Topic:



Currency Options

Skill:



Recognition

21)



An option whose exercise price is equal to the spot rate is said to be ________.

A)



in-the-money

B)



at-the-money

C)



out-of-the-money

D)



on-the-spot

Answer:



B

Topic:



Currency Options

Skill:



Recognition

22)



Foreign currency options are available both over-the-counter and on organized exchanges.

Answer:



TRUE

Topic:



Currency Options

Skill:



Recognition

23)



The main advantage(s) of over-the-counter foreign currency options over exchange traded options is(are)

A)



expiration dates tailored to the needs of the client.

B)



amounts that are tailor made.

C)



client desired expiration dates.

D)



all of the above.

Answer:



D

Topic:



Currency Options

Skill:



Recognition

24)



As a general statement, it is safe to say that businesses generally use the ________ for foreign currency option contracts, and individuals and financial institutions typically use the ________.

A)



exchange markets; over-the-counter

B)



over-the-counter; exchange markets

C)



private; government sponsored

D)



government sponsored; private

Answer:



B

Topic:



Currency Options

Skill:



Recognition


25)



All exchange-traded options are settled through a clearing house but over-the-counter options are not and are thus subject to greater ________ risk.

A)



exchange rate

B)



country

C)



counterparty

D)



none of the above

Answer:



C

Topic:



Currency Options

Skill:



Recognition

26)



When reading the futures quotation in the financial section of the newspaper, the column heading indicating the number of contracts outstanding is called ________.

A)



contracts outstanding

B)



settle

C)



open interest

D)



short positions

Answer:



C

Topic:



Currency Futures

Skill:



Recognition

27)



The amount that an investor pays to obtain an option may be described as the ________.

A)



premium

B)



price

C)



cost

D)



all of the above

Answer:



D

Topic:



Currency Options

Skill:



Recognition
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