International Financial Management

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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. ANS: C PTS: 1 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…show more content…
a. call options; put options b. futures contracts; call options c. forward contracts; futures contracts d. put options; forward contracts ANS: D PTS: 1 15. 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. a. greater; lower b. greater; greater c. lower; greater d. lower; lower ANS: B PTS: 1 16. When currency options are not standardized and traded over-the-counter, there is ____ liquidity and a ____ bid/ask spread. a. less; narrower b. more; narrower c. more; wider d. less; wider ANS: D PTS: 1 17. The shorter the time to the expiration date for a currency, the ____ will be the premium of a call option, and the ____ will be the premium of a put option, other things equal. a. greater; greater b. greater; lower c. lower; lower d. lower; greater ANS: C PTS: 1 18. Assume that a speculator purchases a put option on British pounds (with a strike price of $1.50) for $.05 per unit. A pound option represents 31,250 units. Assume that at the time of the purchase, the spot rate of the pound is $1.51 and continually rises to $1.62 by the expiration date. The highest net profit possible for the speculator based on the information above is: a. $1,562.50. b. − $1,562.50. c. − $1,250.00. d. − $625.00. ANS: B SOLUTION: The premium of the option is $.05 × (31,250 units) = $1,562.50. Since the option will not
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