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Chapter5—CurrencyDerivatives1.Kalons,Inc.isaU.S.-basedMNCthatfrequentlyimportsrawmaterialsfromCanada.KalonsistypicallyinvoicedforthesegoodsinCanadiandollarsandisconcernedthattheCanadiandollarwillappreciateinthenearfuture.Whichofthefollowingisnotanappropriatehedgingtechniqueunderthesecircumstances?a.purchaseCanadiandollarsforward.b.purchaseCanadiandollarfuturescontracts.c.purchaseCanadiandollarputoptions.d.purchaseCanadiandollarcalloptions.ANS:CPTS:12.Graylon,Inc.,basedinWashington,exportsproductstoaGermanfirmandwillreceivepaymentof€200,000inthreemonths.OnJune1,thespotrateoftheeurowas$1.12,andthe3-monthforwardratewas$1.10.OnJune1,Graylonnegotiatedaforwardcontractwithabanktosell€200,000forwardinthreemonths.ThespotrateoftheeuroonSeptember1is$1.15.Graylonwillreceive$____fortheeuros.a.224,000b.220,000c.200,000d.230,000ANS:BSOLUTION:€200,000$1.10=$220,000PTS:13.Theone-yearforwardrateoftheBritishpoundisquotedat$1.60,andthespotrateoftheBritishpoundisquotedat$1.63.Theforward____is____percent.a.discount;1.9b.discount;1.8c.premium;1.9d.premium;1.8ANS:BSOLUTION:(F/S)1=($1.60/$1.63)1=1.8percent.PTS:14.The90-dayforwardratefortheeurois$1.07,whilethecurrentspotrateoftheeurois$1.05.Whatistheannualizedforwardpremiumordiscountoftheeuro?a.1.9percentdiscount.b.1.9percentpremium.c.7.6percentpremium.d.7.6percentdiscount.ANS:CSOLUTION:[(F/S)1]360/90=7.6percent.PTS:15.Thornton,Inc.needstoinvestfivemillionNepaleserupeesinitsNepalesesubsidiarytosupportlocaloperations.Thorntonwouldlikeitssubsidiarytorepaytherupeesinoneyear.Thorntonwouldliketoengageinaswaptransaction.Thus,Thorntonwould:a.converttherupeestodollarsinthespotmarkettodayandconvertrupeestodollarsinoneyearattoday'sforwardrate.b.convertthedollarstorupeesinthespotmarkettodayandconvertdollarstorupeesinoneyearattheprevailingspotrate.c.convertthedollarstorupeesinthespotmarkettodayandconvertrupeestodollarsinoneyearattoday'sforwardrate.d.convertthedollarstorupeesinthespotmarkettodayandconvertrupeestodollarsinoneyearattheprevailingspotrate.ANS:CPTS:16.IntheU.S.,thetypicalcurrencyfuturescontractisbasedonacurrencyvalueintermsof:a.euros.b.U.S.dollars.c.Britishpounds.d.Canadiandollars.ANS:BPTS:17.Currencyfuturescontractssoldonanexchange:a.containacommitmenttotheowner,andarestandardized.b.containacommitmenttotheowner,andcanbetailoredtothedesireoftheowner.c.containarightbutnotacommitmenttotheowner,andcanbetailoredtothedesireoftheowner.d.containarightbutnotacommitmenttotheowner,andarestandardized.ANS:APTS:18.Currencyoptionssoldthroughanoptionsexchange:a.containacommitmenttotheowner,andarestandardized.b.containacommitmenttotheowner,andcanbetailoredtothedesireoftheowner.c.containarightbutnotacommitmenttotheowner,andcanbetailoredtothedesireoftheowner.d.containarightbutnotacommitmenttotheowner,andarestandardized.ANS:DPTS:19.Currencyoptionsarecommonlytradedthroughthe____system.a.robotb.Euroc.GLOBEXd.ScopeANS:CPTS:110.Forwardcontracts:a.containacommitmenttotheowner,andarestandardized.b.containacommitmenttotheowner,andcanbetailoredtothedesireoftheowner.c.containarightbutnotacommitmenttotheowner,andcanbetailoredtothedesireoftheowner.d.containarightbutnotacommitmenttotheowner,andarestandardized.ANS:BPTS:111.WhichofthefollowingisthemostlikelystrategyforaU.S.firmthatwillbereceivingSwissfrancsinthefutureanddesirestoavoidexchangeraterisk(assumethefirmhasnooffsettingpositioninfrancs)?a.purchaseacalloptiononfrancs.b.sellafuturescontractonfrancs.c.obtainaforwardcontracttopurchasefrancsforward.d.alloftheaboveareappropriatestrategiesforthescenariodescribed.ANS:BPTS:112.WhichofthefollowingisthemostunlikelystrategyforaU.S.firmthatwillbepurchasingSwissfrancsinthefutureanddesirestoavoidexchangeraterisk(assumethefirmhasnooffsettingpositioninfrancs)?a.purchaseacalloptiononfrancs.b.obtainaforwardcontracttopurchasefrancsforward.c.sellafuturescontractonfrancs.d.alloftheaboveareappropriatestrategiesforthescenariodescribed.ANS:CPTS:113.Ifyourfirmexpectstheeurotosubstantiallydepreciate,itcouldspeculateby____eurocalloptionsor____eurosforwardintheforwardexchangemarket.a.selling;sellingb.selling;purchasingc.purchasing;purchasingd.purchasing;sellingANS:APTS:114.Whenyouown____,thereisnoobligationonyourpart;however,whenyouown____,thereisanobligationonyourpart.a.calloptions;putoptionsb.futurescontracts;calloptionsc.forwardcontracts;futurescontractsd.putoptions;forwardcontractsANS:DPTS:115.Thegreaterthevariabilityofacurrency,the____willbethepremiumofacalloptiononthiscurrency,andthe____willbethepremiumofaputoptiononthiscurrency,otherthingsequal.a.greater;lowerb.greater;greaterc.lower;greaterd.lower;lowerANS:BPTS:116.Whencurrencyoptionsarenotstandardizedandtradedover-the-counter,thereis____liquidityanda____bid/askspread.a.less;narrowerb.more;narrowerc.more;widerd.less;widerANS:DPTS:117.Theshorterthetimetotheexpirationdateforacurrency,the____willbethepremiumofacalloption,andthe____willbethepremiumofaputoption,otherthingsequal.a.greater;greaterb.greater;lowerc.lower;lowerd.lower;greaterANS:CPTS:118.Assumethataspeculatorpurcha