International Financial Management
14th Edition
ISBN: 9780357130698
Author: Madura
Publisher: Cengage
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How is that a currency futures contracts eliminate the possibilty of gaining a windfall profit from favorable movements ?
Select all of the following statements that accurately compare or contrast forwards and options:
Group of answer choices
Taking naked long positions in either a call or forward will lead to an overall long position in the underlying security.
Options and forwards always have identical payoffs if the spot price remains the same.
Both options and forwards can be used to reduce exposure to foreign exchange risk.
Going long a naked put option and going short a naked forward both cause unlimited liability.
Both options and forwards require the payment of a premium at the initiation of the contract.
Forward contracts impose obligations on both parties in the transaction. Options contracts only impose an obligation on one party.
Consider a firm in the DC that uses inputs from a supplier in the FC. To hedge the FX risk the FC firm could (select all that are true):
A.Purchase a futures contract for DC to FC below your expected future trajectory of the FX rate and that the supply cotract is written in the DC
B.Purchase a call option for FC to DC, which the firm will exercise if the spot FX rate (FC/DC) at the time is higher than the contract rate and the supply contract is written in the DC.
C.Purchase a futures contract for FC to DC that you could sell for a profit if the DC weakens, which increases your costs of exporting the input
D.Engage in a forward contract for DC to FC at today's spot rate, given that counter-party risk is managable and that the supply contract can be written in the DC.
E.Exercise a futures contract for DC to FC if the strike price of the contract (FC/DC) is higher than the spot market rate at that time and that the supply contrtact can be written in the DC.
F.Purchase a call option…
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- Describe how commodity futures markets can beused to reduce input price risk.arrow_forwardIf the forward rate is expected to be an unbiased estimate of the future spot rate, and interest rate parity holds, then: a. the international Fisher effect (IFE) is refuted. b. the international Fisher effect (IFE) is supported. c. covered interest arbitrage is feasible. d. the average absolute error from forecasting would equal zero.arrow_forwardBelow is a chart with profit/loss on the vertical axis, and the $/£ exchange rate on the horizontal axis. The solid line shows the profit/loss schedule for a: Question 8 options: put option in isolation (e.g. used for speculating that the pound will depreciate) None of the above covered call option (a call option is used as a hedge) covered put option (a put option is used as a hedge)arrow_forward
- Suppose the solid line represents the capital market line that results from a CAPM equilibrium and the dotted curves represent indifference curves for a given individual. Which of the following is correct if point M corresponds to the market portfolio? Group of answer choices The individual optimally holds only the market portfolio, M. The individual optimally holds portfolio B which can be partially characterized by a long position in the riskless asset. The individual optimally holds portfolio B which can be partially characterized by a short position in the riskless security The individual optimally holds portfolio A which can be partially characterized by a long position in the riskless security. None of the above.arrow_forwardSuppose that C is the price of a European call option to purchase a security whose present price is S. Show that if C>S then there is an opportunity for arbitrage (ie. riskless profit). Assume the interest rate r=0 so present value calculations are unnecessary.arrow_forwardDiscuss the factors giving rise to an inverted futures market for a storable versus a non-storable commodity. What are the implications for a hedger?arrow_forward
- 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.arrow_forwardIn the single-index model represented by the equation ri = E(ri) + βiF + ei, the term ei represents A. the impact of anticipated firm-specific events on security i's return. B. the impact of changes in the market on security i's return. C. the impact of unanticipated macroeconomic events on security i's return. D. the impact of anticipated macroeconomic events on security i's return. E. the impact of unanticipated firm-specific events on security i's return.arrow_forwardSuppose that the relevant equilibrium model is the CAPM with unlimited borrowing and lending at a riskless rate of interest. Assuming, you discovered a security that was located below the security market line. What would you conclude about the pricing of this particular security? Describe any changes you would expect to occur in its price.arrow_forward
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