International Finance

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Chapter 5

Currency Derivatives

1. Kalons, Inc. is a U.S.-based MNC that frequently imports raw materials from Canada. Kalons is typically invoiced for these goods in Canadian dollars and is concerned that the Canadian dollar will appreciate in the near future. Which of the following is not an appropriate hedging technique under these circumstances? A) purchase Canadian dollars forward.

B) purchase Canadian dollar futures contracts.
C) purchase Canadian dollar put options.
D) purchase Canadian dollar call options.

ANSWER:C

2. 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 €200,000 forward in three months. The spot rate of the euro on September 1 is $1.15. Graylon will receive $_______ for the euros.

A) 224,000
B) 220,000
C) 200,000
D) 230,000

ANSWER:B

SOLUTION: €200,000 × $1.10 = $220,000

3. 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) discount; 1.9
B) discount; 1.8
C) premium; 1.9
D) premium; 1.8

ANSWER:B

SOLUTION: (F/S) – 1 = ($1.60/$1.63) – 1 = –1.8 percent.

4. 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) 1.9 percent discount.

B) 1.9 percent premium.
C) 7.6 percent premium.
D) 7.6 percent discount.

ANSWER:C

SOLUTION: [(F/S) – 1] × 360/90 = 7.6 percent.

5. Thornton, Inc. needs to invest five million Nepalese rupees in its Nepalese subsidiary to support local operations. Thornton would like its subsidiary to repay the rupees in one year. Thornton would like to engage in a swap transaction. Thus, Thornton would: A) convert the rupees to dollars in the spot market today and convert rupees to dollars in one year at today’s forward rate. B) convert the dollars to rupees in the spot market today and convert dollars to rupees in one year at the prevailing spot rate. C) convert the dollars to rupees in the spot market today and convert rupees to dollars in one year at today’s forward rate. D) convert the dollars to rupees in the spot market today and convert rupees to dollars in one year at the prevailing spot rate.

ANSWER:C

6. In the U.S., the typical currency futures contract is based on a currency value in terms of: A) euros.
B) U.S. dollars.
C) British pounds.
D) Canadian dollars.

ANSWER:B

7.Currency futures contracts sold on an exchange:
A)contain a commitment to the owner, and are standardized.
B)contain a commitment to the owner, and can be tailored to the desire of the owner. C)contain a right but not a commitment to the owner, and can be tailored to the desire of the owner.
D)contain a right but not a commitment to the owner, and are standardized.

ANSWER:A

8.Currency options sold through an options exchange:
A)contain a commitment to the owner, and are standardized.
B)contain a commitment to the owner, and can be tailored to the desire of the owner. C)contain a right but not a commitment to the owner, and can be tailored to the desire of the owner.
D)contain a right but not a commitment to the owner, and are standardized.

ANSWER:D

9. Currency options are traded through the GLOBEX system at the: A) Chicago Board Options Exchange when the trading floor is open. B) Chicago Mercantile Exchange when the trading floor is open. C) Chicago Mercantile Exchange even after the trading floor is closed. D) Philadelphia Exchange even after the trading floor is closed. E) Chicago Board Options...
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