Eun8e chapter 07 tb answerkey PDF

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International Financial Management, 8e (Eun) Chapter 7 Futures and Options on Foreign Exchange A put option on $15,000 with a strike price of €10,000 is the same thing as a call option on €10,000 with a strike price of $15,000. Answer: TRUE Topic: Basic Option-Pricing Relationships at Expiration Acc...

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International Financial Management, 8e (Eun) Chapter 7 Futures and Options on Foreign Exchange 1) A put option on $15,000 with a strike price of €10,000 is the same thing as a call option on €10,000 with a strike price of $15,000. Answer: TRUE Topic: Basic Option-Pricing Relationships at Expiration Accessibility: Keyboard Navigation 2) A CME contract on €125,000 with September delivery A) is an example of a forward contract. B) is an example of a futures contract. C) is an example of a put option. D) is an example of a call option. Answer: B Topic: Futures Contracts: Some Preliminaries Accessibility: Keyboard Navigation 3) Yesterday, you entered into a futures contract to buy €62,500 at $1.50 per €. Suppose the futures price closes today at $1.46. How much have you made/lost? A) Depends on your margin balance. B) You have made $2,500.00. C) You have lost $2,500.00. D) You have neither made nor lost money, yet. Answer: C Explanation: You will pay $93,750 under your futures contract (found by 62,500 × 1.5), but the new price would have resulted in a payment of $91,250. $91,250 – $93,750 = –$2,500. Topic: Futures Contracts: Some Preliminaries 4) In reference to the futures market, a "speculator" A) attempts to profit from a change in the futures price. B) wants to avoid price variation by locking in a purchase price of the underlying asset through a long position in the futures contract or a sales price through a short position in the futures contract. C) stands ready to buy or sell contracts in unlimited quantity. D) wants to avoid price variation by locking in a purchase price of the underlying asset through a long position in the futures contract or a sales price through a short position in the futures contract, and also stands ready to buy or sell contracts in unlimited quantity. Answer: A Topic: Futures Contracts: Some Preliminaries

5) Comparing "forward" and "futures" exchange contracts, we can say that A) they are both "marked-to-market" daily. B) their major difference is in the way the underlying asset is priced for future purchase or sale: futures settle daily and forwards settle at maturity. C) a futures contract is negotiated by open outcry between floor brokers or traders and is traded on organized exchanges, while forward contract is tailor-made by an international bank for its clients and is traded OTC. D) their major difference is in the way the underlying asset is priced for future purchase or sale: futures settle daily and forwards settle at maturity, and a futures contract is negotiated by open outcry between floor brokers or traders and is traded on organized exchanges, while a forward contract is tailor-made by an international bank for its clients and is traded OTC. Answer: D Topic: Futures Contracts: Some Preliminaries Accessibility: Keyboard Navigation 6) Comparing "forward" and "futures" exchange contracts, we can say that A) delivery of the underlying asset is seldom made in futures contracts. B) delivery of the underlying asset is usually made in forward contracts. C) delivery of the underlying asset is seldom made in either contract—they are typically cash settled at maturity. D) delivery of the underlying asset is seldom made in futures contracts and delivery of the underlying asset is usually made in forward contracts. Answer: D Topic: Futures Contracts: Some Preliminaries Accessibility: Keyboard Navigation 7) In which market does a clearinghouse serve as a third party to all transactions? A) Futures B) Forwards C) Swaps D) none of the options Answer: A Topic: Futures Contracts: Some Preliminaries Accessibility: Keyboard Navigation

8) In the event of a default on one side of a futures trade, A) the clearing member stands in for the defaulting party. B) the clearing member will seek restitution for the defaulting party. C) if the default is on the short side, a randomly selected long contract will not get paid. That party will then have standing to initiate a civil suit against the defaulting short. D) the clearing member stands in for the defaulting party and will seek restitution for the defaulting party. Answer: D Topic: Futures Contracts: Some Preliminaries Accessibility: Keyboard Navigation 9) Yesterday, you entered into a futures contract to buy €62,500 at $1.50 per €. Your initial performance bond is $1,500 and your maintenance level is $500. At what settle price will you get a demand for additional funds to be posted? A) $1.5160 per €. B) $1.208 per €. C) $1.1920 per €. D) $1.4840 per €. Answer: D Explanation: $93,750 – $1,000 = $92,750 / €62,500 = $1.484 Topic: Futures Contracts: Some Preliminaries 10) Yesterday, you entered into a futures contract to sell €75,000 at $1.79 per €. Your initial performance bond is $1,500 and your maintenance level is $500. At what settle price will you get a demand for additional funds to be posted? A) $1.7767 per €. B) $1.2084 per €. C) $1.6676 per €. D) $1.1840 per €. Answer: A Explanation: $134,250 – $1,000 = $133,250 / €75,000 = $1.7767 Topic: Futures Contracts: Some Preliminaries

11) Yesterday, you entered into a futures contract to buy €62,500 at $1.50/€. Your initial margin was $3,750 (= 0.04 × €62,500 × $1.50/€ = 4 percent of the contract value in dollars). Your maintenance margin is $2,000 (meaning that your broker leaves you alone until your account balance falls to $2,000). At what settle price (use 4 decimal places) do you get a margin call? A) $1.4720/€ B) $1.5280/€ C) $1.500/€ D) none of the options Answer: A Explanation: $93,750 – $1,750 = $92,000 / €62,500 = $1.472 Topic: Futures Contracts: Some Preliminaries 12) Three days ago, you entered into a futures contract to sell €62,500 at $1.50 per €. Over the past three days the contract has settled at $1.50, $1.52, and $1.54. How much have you made or lost? A) Lost $0.04 per € or $2,500 B) Made $0.04 per € or $2,500 C) Lost $0.06 per € or $3,750 D) none of the options Answer: A Explanation: You will sell your euros for $93,750. The highest contract price over the three days was $1.54. Thus, you could have sold your euros for $96,250 (found by 62,500 × 1.54). Finally, $96,250 – $93,750 = –$2,500. Topic: Futures Contracts: Some Preliminaries 13) Today's settlement price on a Chicago Mercantile Exchange (CME) yen futures contract is $0.8011/¥100. Your margin account currently has a balance of $2,000. The next three days' settlement prices are $0.8057/¥100, $0.7996/¥100, and $0.7985/¥100. (The contractual size of one CME yen contract is ¥12,500,000). If you have a short position in one futures contract, the changes in the margin account from daily marking-to-market will result in the balance of the margin account after the third day to be A) $1,425. B) $2,000. C) $2,325. D) $3,425. Answer: C Explanation: $2,000 + ¥12,500,000 [(0.008011 – 0.008057) + (0.008057 – 0.007996) + (0.007996 – 0.007985)] = $2,325, where 0.008011 = $0.8011/¥100, 0.008057 = $0.8057//¥100, 0.007996 = $0.7996//¥100, and 0.007985 = $0.7985/¥100. Topic: Currency Futures Markets

14) Today's settlement price on a Chicago Mercantile Exchange (CME) yen futures contract is $0.8011/¥100. Your margin account currently has a balance of $2,000. The next three days' settlement prices are $0.8057/¥100, $0.7996/¥100, and $0.7985/¥100. (The contractual size of one CME yen contract is ¥12,500,000). If you have a long position in one futures contract, the changes in the margin account from daily marking-to-market, will result in the balance of the margin account after the third day to be A) $1,425. B) $1,675. C) $2,000. D) $3,425 Answer: B Explanation: $2,000 + ¥12,500,000 [(0.008057 – 0.008011) + (0.007996 – 0.008057) + (0.007985 – 0.007996)] = $1,675, where 0.008057 = $0.8057//¥100, 0.008011 = $0.8011/¥100, 0.007996 = $0.7996//¥100, and 0.007985 = $0.7985/¥100. Topic: Currency Futures Markets 15) Suppose the futures price is below the price predicted by IRP. What steps would assure an arbitrage profit? A) Go short in the spot market, go long in the futures contract. B) Go long in the spot market, go short in the futures contract. C) Go short in the spot market, go short in the futures contract. D) Go long in the spot market, go long in the futures contract. Answer: A Topic: Currency Futures Markets 16) What paradigm is used to define the futures price? A) IRP B) Hedge Ratio C) Black Scholes D) Risk Neutral Valuation Answer: A Topic: Currency Futures Markets Accessibility: Keyboard Navigation

17) Suppose you observe the following one-year interest rates, spot exchange rates and futures prices. Futures contracts are available on €10,000. How much risk-free arbitrage profit could you make on one contract at maturity from this mispricing? Exchange Rate S0($/€) $1.45 = €1.00 F360($/€) $1.48 = €1.00 A) $159.22 B) $153.10 C) $439.42 D) none of the options

Interest Rate

APR i$4% i€3%

Answer: A Explanation: The futures price of $1.48/€ is above the IRP futures price of $1.4641/€, so we want to sell (i.e. take a short position in one futures contract on €10,000, agreeing to sell €10,000 in one year for $14,800).

Profit = $159.2233 = €10,000 × To hedge, we borrow $14,077.67 today at 4 percent, convert to euro at the spot rate of $1.45/€, invest at 3 percent. At maturity, our investment matures and pays €10,000, which we sell for $14,800, and then we repay our dollar borrowing with $14,640.78. Our risk-free profit = $159.22 = $14,800 – $14,640.78. Topic: Currency Futures Markets 18) Which equation is used to define the futures price?

A)

=

B)

=

C)

=

D) F($ / €) - S($ / €) =

-

Answer: A Topic: Currency Futures Markets

19) Which equation is used to define the futures price?

A)

=

B)

=

C)

=

D)

=

Answer: A Topic: Currency Futures Markets 20) If a currency futures contract (direct quote) is priced below the price implied by Interest Rate Parity (IRP), arbitrageurs could take advantage of the mispricing by simultaneously A) going short in the futures contract, borrowing in the domestic currency, and going long in the foreign currency in the spot market. B) going short in the futures contract, lending in the domestic currency, and going long in the foreign currency in the spot market. C) going long in the futures contract, borrowing in the domestic currency, and going short in the foreign currency in the spot market. D) going long in the futures contract, borrowing in the foreign currency, and going long in the domestic currency, investing the proceeds at the local rate of interest. Answer: D Topic: Currency Futures Markets Accessibility: Keyboard Navigation 21) Open interest in currency futures contracts A) tends to be greatest for the near-term contracts. B) tends to be greatest for the longer-term contracts. C) typically decreases with the term to maturity of most futures contracts. D) tends to be greatest for the near-term contracts, and typically decreases with the term to maturity of most futures contracts. Answer: D Topic: Basic Currency Futures Relationships Accessibility: Keyboard Navigation

22) The "open interest" shown in currency futures quotations is A) the total number of people indicating interest in buying the contracts in the near future. B) the total number of people indicating interest in selling the contracts in the near future. C) the total number of people indicating interest in buying or selling the contracts in the near future. D) the total number of long or short contracts outstanding for the particular delivery month. Answer: D Topic: Basic Currency Futures Relationships Accessibility: Keyboard Navigation 23) If you think that the dollar is going to appreciate against the euro, you should A) buy put options on the euro. B) sell call options on the euro. C) buy call options on the euro. D) none of the options Answer: C Topic: Options Contracts: Some Preliminaries Accessibility: Keyboard Navigation 24) From the perspective of the writer of a put option written on €62,500. If the strike price is $1.55/€, and the option premium is $1,875, at what exchange rate do you start to lose money? A) $1.52/€ B) $1.55/€ C) $1.58/€ D) none of the options Answer: A Explanation: The writer will collect $96,875 if the option is exercised (€62,500 × $1.55), and is due an option premium of $1,875. Thus, $96,875 – $1,875 = $95,000. Solve the following for X: ($96,875 / $1.55) = ($95,000 / X). Topic: Options Contracts: Some Preliminaries 25) A European option is different from an American option in that A) one is traded in Europe and one in traded in the United States. B) European options can only be exercised at maturity; American options can be exercised prior to maturity. C) European options tend to be worth more than American options, ceteris paribus. D) American options have a fixed exercise price; European options' exercise price is set at the average price of the underlying asset during the life of the option. Answer: B Topic: Options Contracts: Some Preliminaries Accessibility: Keyboard Navigation 26) An "option" is A) a contract giving the seller (writer) of the option the right, but not the obligation, to buy (call) or sell (put) a given quantity of an asset at a specified price at some time in the future.

B) a contract giving the owner (buyer) of the option the right, but not the obligation, to buy (call) or sell (put) a given quantity of an asset at a specified price at some time in the future. C) a contract giving the owner (buyer) of the option the right, but not the obligation, to buy (put) or sell (call) a given quantity of an asset at a specified price at some time in the future. D) a contract giving the owner (buyer) of the option the right, but not the obligation, to buy (put) or sell (sell) a given quantity of an asset at a specified price at some time in the future. Answer: B Topic: Options Contracts: Some Preliminaries Accessibility: Keyboard Navigation 27) An investor believes that the price of a stock, say IBM's shares, will increase in the next 60 days. If the investor is correct, which combination of the following investment strategies will show a profit in all the choices? (i) buy the stock and hold it for 60 days (ii) buy a put option (iii) sell (write) a call option (iv) buy a call option (v) sell (write) a put option A) (i), (ii), and (iii) B) (i), (ii), and (iv) C) (i), (iv), and (v) D) (ii) and (iii) Answer: C Topic: Options Contracts: Some Preliminaries Accessibility: Keyboard Navigation 28) Most exchange traded currency options A) mature every month, with daily resettlement. B) have original maturities of 1, 2, and 3 years. C) have original maturities of 3, 6, 9, and 12 months. D) mature every month, without daily resettlement. Answer: C Topic: Currency Options Markets Accessibility: Keyboard Navigation

29) The volume of OTC currency options trading is A) much smaller than that of organized-exchange currency option trading. B) much larger than that of organized-exchange currency option trading. C) larger, because the exchanges are only repackaging OTC options for their customers. D) none of the options Answer: B Topic: Currency Options Markets Accessibility: Keyboard Navigation 30) In the CURRENCY TRADING section of The Wall Street Journal, the following appeared under the heading OPTIONS: Philadelphia Exchange Swiss France 62,500 Swiss Francs-cents per unit

Puts

68 May 69 May

Vol. 12 50

69.33 Last 0.30 0.50

Which combination of the following statements are true? (i) The time values of the 68 May and 69 May put options are respectively .30 cents and .50 cents. (ii) The 68 May put option has a lower time value (price) than the 69 May put option. (iii) If everything else is kept constant, the spot price and the put premium are inversely related. (iv) The time values of the 68 May and 69 May put options are, respectively, 1.63 cents and 0.83 cents. (v) If everything else is kept constant, the strike price and the put premium are inversely related. A) (i), (ii), and (iii) B) (ii), (iii), and (iv) C) (iii) and (iv) D) (iv) and (v) Answer: A Topic: Currency Options Markets 31) With currency futures options the underlying asset is A) foreign currency. B) a call or put option written on foreign currency. C) a futures contract on the foreign currency. D) none of the options Answer: C Topic: Currency Futures Options Accessibility: Keyboard Navigation 32) Exercise of a currency futures option results in A) a long futures position for the call buyer or put writer.

B) a short futures position for the call buyer or put writer. C) a long futures position for the put buyer or call writer. D) a short futures position for the call buyer or put buyer. Answer: A Topic: Currency Futures Options Accessibility: Keyboard Navigation 33) A currency futures option amounts to a derivative on a derivative. Why would something like that exist? A) For some assets, the futures contract can have lower transaction costs and greater liquidity than the underlying asset. B) Tax consequences matter as well, and for some users an option contract on a future is more tax efficient. C) Transaction costs and liquidity D) all of the options Answer: D Topic: Currency Futures Options Accessibility: Keyboard Navigation 34) The current spot exchange rate is $1.55 = €1.00 and the three-month forward rate is $1.60 = €1.00. Consider a three-month American call option on €62,500. For this option to be considered at-the-money, the strike price must be A) $1.60 = €1.00. B) $1.55 = €1.00. C) $1.55 × = €1.00 × D) none of the options

.

Answer: B Topic: Basic Option-Pricing Relationships at Expiration 35) The current spot exchange rate is $1.55 = €1.00 and the three-month forward rate is $1.60 = €1.00. Consider a three-month American call option on €62,500 with a strike price of $1.50 = €1.00. Immediate exercise of this option will generate a profit of A) $6,125. B) $6,125/(1 + )3/12. C) negative profit, so exercise would not occur. D) $3,125. Answer: D Explanation: €62,500 ($1.55 – $1.50) = $3,125 Topic: Basic Option-Pricing Relationships at Expiration 36) The current spot exchange rate is $1.55 = €1.00 and the three-month forward rate is $1.60 = €1.00. Consider a three-month American call option on €62,500 with a strike price of $1.50 = €1.00. If you pay an option premium of $5,000 to buy this call, at what exchange rate will you

break-even? A) $1.58 = €1.00 B) $1.62 = €1.00 C) $1.50 = €1.00 D) $1.68 = €1.00 Answer: A Explanation: $1.55 × €62,500 = $96,875 and $1.50 × €62,500 = $93,750. To buy the call, you also must pay a $5,000 option premium, so if exercised, the total amount paid will be $93,750 + $5,000 = $98,750. Solve the following for X: ($96,875 / $1.55) = ($98,750 / X). Topic: Basic Option-Pricing Relationships at Expiration

37) Consider this graph of a call option. The option is a three-month American call option on €62,500 with a strike price of $1.50 = €1.00 and an option premium of $3,125. What are the values of A, B, and C, respectively?

A) A = $3,125 (or $.05 depending on your scale); B = $1.50; C = $1.55 B) A = €3,750 (or €.06 depending on your scale); B = $1.50; C = $1.55 C) A = $.05; B = $1.55; C = $1.60 D) none of the options Answer: A Explanation: The option premium is $3,125, or $3,125/€62,500 = $0.05. This represents A. To find C, A and B (the exercise price) must be added together. Thus, C = $0.05 + $1.50 = $1.55. Topic: Basic Option-Pricing Relationships at Expiration

38) Which of the lines is a graph of the profit at maturity of writing a call option on €62,500 with a strike price of $1.20 = €1.00 and an option premium of $3,125?

A) A B) B C) C D) D Answer: B Topic: Basic Option-Pricing Relationships at Expiration 39) The current spot exchange rate is $1.55 = €1.00; the three-month U.S. dollar interest rate is 2 percent. Consider a three-month American call option on €62,500 with a strike price of $1.50 = €1.00. What is the least that this option should sell for? A) $0.05 × 62,500 = $3,125 B) $3,125/1.02 = $3,063.73 C) $0.00 D) none of the opti...