Answers to End of Chapter 5 Questions DOC

Title	Answers to End of Chapter 5 Questions
Author	Roxana aguilar
Pages	11
File Size	80 KB
File Type	DOC
Total Downloads	53
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Answers to End of Chapter 5 Questions 1. Forward versus Futures Contracts. Compare and contrast forward and futures contracts. ANSWER: Because currency futures contracts are standardized into small amounts, they can be valuable for the speculator or small firm (a commercial bank's forward contracts are more common for larger amounts). However, the standardized format of futures forces limited maturities and amounts. 2. Using Currency Futures. a. How can currency futures be used by corporations? ANSWER: U.S. corporations that desire to lock in a price at which they can sell a foreign currency would sell currency futures. U.S. corporations that desire to lock in a price at which they can purchase a foreign currency would purchase currency futures. b. How can currency futures be used by speculators? ANSWER: Speculators who expect a currency to appreciate could purchase currency futures contracts for that currency. Speculators who expect a currency to depreciate could sell currency futures contracts for that currency. 3. Currency Options. Differentiate between a currency call option and a currency put option. ANSWER: A currency call option provides the right to purchase a specified currency at a specified price within a specified period of time. A currency put option provides the right to sell a specified currency for a specified price within a specified period of time. 4. Forward Premium. Compute the forward discount or premium for the Mexican peso whose 90-day forward rate is $.102 and spot rate is $.10. State whether your answer is a discount or premium. ANSWER: (F - S) / S =($.098 - $.10) / $.10 × (360/90) = –.02, or –2%, which reflects a 8% discount 5. Effects of a Forward Contract. How can a forward contract backfire? ANSWER: If the spot rate of the foreign currency at the time of the transaction is worth less than the forward rate that was negotiated, or is worth more than the forward rate that was negotiated, the forward contract has backfired....