1. Which of the following is true of options? (a) The buyer decides if the options will be exercised. (b) The seller decides if the options will be exercised. (c) The seller pays the buyer the option premium. (d) All of the above 2. Currency futures contracts specify a standard volume of a particular currency to be exchanged on a specific settlement date at a specified exchange rate. (a) True (b) False 3. A UK-based MNC expects to receive £20,000 from domestic operations and 20,000 Euro (€) from a business in Belgium. If the pound’s value is €1.0959, they expected total cash flow in pound are: (a) £42,000 (b) £41,000 (c) £39,470 (d) £38,250

1. Which of the following is true of options? (a) The buyer decides if the options will be exercised. (b) The seller decides if the options will be exercised. (c) The seller pays the buyer the option premium. (d) All of the above 2. Currency futures contracts specify a standard volume of a particular currency to be exchanged on a specific settlement date at a specified exchange rate. (a) True (b) False 3. A UK-based MNC expects to receive £20,000 from domestic operations and 20,000 Euro (€) from a business in Belgium. If the pound’s value is €1.0959, they expected total cash flow in pound are: (a) £42,000 (b) £41,000 (c) £39,470 (d) £38,250

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter20: Short-term Financing

Section: Chapter Questions

Problem 2QA

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Assume you can exchange $1 for either £1.0 or €0.50 in the U.S. In the London market, you can exchange £1 for €0.52. This situation creates an opportunity to profit immediately from which one of the following? A. Futures arbitrage B. Currency hedge C. Interest rate swap D. Absolute purchasing power parity E. Triangle arbitrage
a) define the following, and discuss the difference between them at origination, before expiration, and at expiration. ◦forward price and the value of a forward contract ◦futures price and the value of a futures contract b) discuss the assumptions under which futures and forward prices can be considered the same. c) describe how to incorporate discrete and continuous dividends into futures contracts on stocks and stock indices. d) explain and discuss the use of interest rate parity in pricing foreign currency forwards and futures. e) describe how spot prices are determined using the cost-of-carry model.
a)explain how to price a currency swap if either set of payments is at a floating rate. b)explain how a currency swap can be used to convert a loan in one currency into a loan in another currency, and provide some reasons for doing so. c)demonstrate that a currency swap contract is equivalent to a series of forward contracts. d)explain how a currency swap can be used to hedge a stream of foreign cash flows. e)define interest rate derivatives, and compare and contrast them against bond derivatives.
Suppose you observe the following exchange rates and interest rates for the USD and THB: Bid Ask USD/THB 30.01 30.31 USD/THB F,360 ? ? Trader lends at Trader borrows at I USD 1.55% 1.75% I THB 0.60% 0.85% Which answer is closest to the minimum forward ask (USD/THBAF,360) that prevents covered interest rate arbitrage? 25.29 29.67 30.13 30.97 29.97
PQ 3 In which of the following relationships between the expected future spot rate (E(e)) of a foreign currency and the current forward rate (e fwd) of a foreign currency would a speculator have an incentive to sell foreign currency in the forward market? a. E (e) = e fwd bb. E(e) greater than e fwd c. E(e) less than e fwd d. E (e) = (1/d fwd)
Explain the nature of potential risks in international transactions and critically discuss how international traders might manage such risks via the derivative markets. b. Critically examine why a firm should consider hedging net payables or net receivables with currency options rather than: (i) forward contracts, and (ii) future contracts. c. What are the advantages or the disadvantages of hedging with currency options as opposed to future contracts in international financial transactions?(Give examples and use relevant financial charts to illustrate your answer).
OMR is quoted against USD and EURO. Under which of the following condition will the trader have a possibility of arbitrage? a. When the calculated cross rate of USD/EURO is different from Quoted cross rate b. When calculated cross rate of OMR/EUR is different from Quoted cross rate c. When calculated cross rate of OMR/USD is greater than quoted rate d. When calculated cross rate of USD/EUR is equal to Quoted cross rate Which of the following is true about derivatives? a. Value of derivative is derived from predetermined asset b. The terms and conditions are flexible under derivative trading c. Derivative markets are suitable for low risk investors d. Risk on derivatives market are always low Which of the following condition may indicate that OMR has depreciated to EUR? a. Spot rate of EUR/OMR is equal to future rate of OMR/EUR b. Spot rate of EUR/OMR is less than future rate of EUR/OMR c. None d. Future rate of EUR/OMR is equal to spot rate…
Which of the following is a reason why the default risk of a futures contract is assumed to be less than that of a forward contract? a. Forward contracts can be tailored, while future contracts are non-standardized. b. Forward contracts are classified as exotic derivatives. c. Futures contracts are exchange-traded contracts, daily settlements are implemented by the clearing house. d. More flexibility as the buyer can decide whether or not to exercise the contract at maturity. e. For futures contracts, all cash flows are required to be paid at one time on contract maturity.
a)explain the structure of a pay-fixed, receive-fixed currency swap, and describe the cash flows at its initiation date, settlement dates, and termination date. b)explain how to determine the notional amounts in two currencies in a currency swap. c)explain the equivalency between a currency swap and a pair of bond transactions in different currencies. d)describe the four types of currency swaps. e)describe the relationship between currency swaps and interest rate swaps.
A firm that has a sum of money denominated in a foreign currency that plans to later convert it to dollars could hedge by which of the following methods. Explain why A. a call on the foreign currency B. a long futures or forward on the foreign currency C. a short put on the foreign currency futures D. all of the above E. none of the above
Which of the following refers to exposure netting? 1. It is a strategy based on adjustments of the times of payments that are made in foreign currencies. 2. It is a practice which implies using swap contracts that have a fixed currency exchange rate. 3. It is a method of hedging transaction risk by offsetting exposure in one currency with exposure in the same or another similar currency. 4. It is a strategy that involves using two distinct assets with positively correlated price movements where the investor takes opposing positions in each investment in an attempt to reduce the risk of holding just one of the securities.
Which of the following best describes the terms 'long forward position' and 'short forward position' in foreign exchange trading? A short forward position is holding a currency for a short duration, while a long forward position is holding it for a longer period. A short forward position means you have agreed to sell a currency in the future, while a long forward position means you have agreed to buy it in the future. A long forward position is when you expect the currency's future spot rate to decrease, and a short forward position is when you expect it to increase. A long forward position means you have agreed to sell a currency in the future, and a short forward position means you have agreed to buy it in the future.