1) The ________ is the mechanism by which participants transfer purchasing power

Question

1) The ________ is the mechanism by which participants transfer purchasing power between countries, obtain or provide credit for international trade transactions, and minimize exposure to the risks of exchange rate changes. A) federal open market B) foreign exchange market C) futures market D) LIBOR 2) The authors identify two tiers of foreign exchange markets: A) commercial and investment transactions. B) client and retail market. C) interbank and client markets. D) bank and nonbank foreign exchange. 3) In the foreign exchange market, ________ seek all of their profit from exchange rate changes while ________ seek to profit from simultaneous exchange rate differences in different markets. A) speculators; arbitragers B) wholesalers; retailers C) dealers; brokers D) central banks; treasuries 4) Foreign exchange ________ earn a profit by a bid-ask spread on currencies they purchase and sell. Foreign exchange ________, on the other hand, earn a profit by bringing together buyers and sellers of foreign currencies and earning a commission on each sale and purchase. A) central banks; treasuries B) speculators; arbitragers C) brokers; dealers D) dealers; brokers 5) Daily trading volume in the foreign exchange market was about ________ per ________ in 2007. A) $3,200 billion; day B) $1,000 billion; month C) $1,000 billion; day D) $3,200 billion; month 6) ________ are NOT one of the three categories reported for foreign exchange. A) Futures transactions B) Swap transactions C) Spot transactions D) Strip transactions 7) The four currencies that constitute about 80% of all foreign exchange trading are A) U.S. dollar, Japanese yen, euro, and U.K. pound. B) U.S. dollar, euro, Chinese yuan, and U.K. pound. C) U.K pound, Chinese yuan, euro, and Japanese yen. D) U.S. dollar, U.K. pound, yen, and Chinese yuan. 8) A forward contract to deliver British pounds for U.S. dollars could be described either as ________ or ________. A) buying dollars forward; buying pounds forward. B) selling pounds forward; selling dollars forward. C) selling dollars forward; buying pounds forward. D) selling pounds forward; buying dollars forward. 9) A common type of swap transaction in the foreign exchange market is the ________ where the dealer buys the currency in the spot market and sells the same amount back to the same bank in the forward market. A) "repurchase agreement" B) "forspot" C) "forward against spot" D) "spot against forward" 10) A foreign exchange ________ is the price of one currency expressed in terms of another currency. A foreign exchange ________ is a willingness to buy or sell at the announced rate. A) rate; rate B) rate; quote C) quote; rate D) quote; quote 11) Most foreign exchange transactions are through the U.S. dollar. If the transaction is expressed as the foreign currency per dollar this known as ________ whereas ________ are expressed as dollars per foreign unit. A) American terms; European terms B) European terms; American terms C) American terms; direct D) European terms; indirect 12) The following is an example of an American term foreign exchange quote: A) $20/£. B) 100¥/€. C) €0.85/$. D) None of the above. 13) From the viewpoint of a British investor, which of the following would be a direct quote in the foreign exchange market? A) $1.50/£ B) SF2.40/£ C) £0.55/€ D) $0.90/€ 14) If the direct quote for a U.S. investor for British pounds is $1.43/£, then the indirect quote for the U.S. investor would be ________ and the direct quote for the British investor would be ________. A) £1.43/£; £0.699/$ B) £0.699/$; $1.43/£ C) $0.699/£; £0.699/$ D) £0.699/$; £0.699/$ 18) The U.S. dollar suddenly changes in value against the euro moving from an exchange rate of $0.8909/euro to $0. 8709/€. Thus, the dollar has ________ by ________. A) appreciated; 2.30% B) depreciated; 2.24% C) appreciated; 2.24% D) depreciated; 2.30% 19) The authors quote an essay on risk from Peter Bernstein in which he states each of the following EXCEPT: A) It is hubris to believe that we can put reliable and stable numbers on the return of the stock market over the next 2, 20, or 50 years. B) The science of risk management is capable of creating new risks even as it brings old risks under control. C) It is rational to use probability instead of timing to demonstrate that an event with low probability is therefore unlikely to ever occur. D) All of the above are part of Peter Bernstein's essay. 20) A foreign currency ________ contract calls for the future delivery of a standard amount of foreign exchange at a fixed time, place, and price. A) futures B) forward C) swap D) option 21) About ________ of all futures contracts are settled by physical delivery of foreign exchange between buyer and seller. A) 50% B) 0% C) 5% D) 95% 22) Futures contracts require that the purchaser deposit an initial sum as collateral. This deposit is called a 38) ______ A) collateralized deposit. B) margin. C) marked market sum. D) settlement. 23) A speculator in the futures market wishing to lock in a price at which they could ________ a foreign currency will ________ a futures contract. A) buy; buy B) buy; sell C) sell; buy D) none of the above 24) Peter Simpson thinks that the U.K. pound will cost $1.43/£ in six months. A 6-month currency futures contract is available today at a rate of $1.44/£. If Peter was to speculate in the currency futures market, and his expectations are correct, which of the following strategies would earn him a profit? A) Sell pounds in six months. B) Sell pounds today. C) Sell a pound currency futures contract. D) Buy a pound currency futures contract. 25) Jack Hemmings bought a 3-month British pound futures contract for $1.4400/£ only to see the dollar appreciate to a value of $1.4250 at which time he sold the pound futures. If each pound futures contract is for an amount of £62,500, how much money did Jack gain or lose from his speculation with pound futures? A) $937.50 gain B) £937.50 gain C) £937.50 loss D) $937.50 loss 26) A foreign currency ________ option gives the holder the right to ________ a foreign currency whereas a foreign currency ________ option gives the holder the right to ________ an option. A) call, sell, put, buy B) put, hold, call, release C) call, buy, put, sell D) none of the above 27) An option whose exercise price is equal to the spot rate is said to be ________. A) in-the-money B) at-the-money C) on-the-spot D) out-of-the-money 28) A call option whose exercise price exceeds the spot price is said to be ________. A) over-the-spot B) in-the-money C) out-of-the-money D) at-the-money 31) Dash Brevenshure works for the currency trading unit of ING Bank in London. He speculates that in the coming months the dollar will rise sharply vs. the pound. What should Dash do to act on his speculation? A) Sell a put on the pound. B) Buy a put on the pound. C) Sell a call on the pound. D) Buy a call on the pound. 32) A put option on yen is written with a strike price of ¥105.00/$. Which spot price maximizes your profit if you choose to exercise the option before maturity? A) ¥115/$ B) ¥100/$ C) ¥110/$ D) ¥105/$ 33) A call option on euros is written with a strike price of $1.30/euro. Which spot price maximizes your profit if you choose to exercise the option before maturity? A) $1.35/euro B) $1.25/euro C) $1.30/euro D) $1.20/euro 34) A call option on UK pounds has a strike price of $2.05/£ and a cost of $0.02. What is the break-even price for the option? A) $2.05/£ B) $2.03/£ C) $2.07/£ D) The answer depends upon if this is a long or a short call option. 35) Your U.S firm has an accounts payable denominated in UK pounds due in 6 months. To protect yourself against unexpected changes in the dollar/pound exchange rate you should A) buy a pound put option. B) sell a pound call option. C) sell a pound put option. D) buy a pound call option. 36) Fred Schwed is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ and the 6-month forward rate is ¥128.53/$. Fred thinks the yen will move to ¥128.00/$ in the next six months. If Fred buys $100,000 worth of yen at today's spot price and sells within the next six months at ¥128/$ he will earn a profit of ________. A) $101,460.94 B) $146.09 C) $1460.94 D) nothing; he will lose money 37) ________ volatility are calculated by being backed out of the market option premium values traded. A) Forward-looking B) Implied C) Historic D) none of the above 38) Assume that a call option has an exercise price of $1.50/£. At a spot price of $1.45/£, the call option has ________. A) a time value of $0.04. B) an intrinsic value of -$0.04. C) a time value of $0.00. D) an intrinsic value of $0.00. 39) The maximum gain for the purchaser of a call option contract is ________ while the maximum loss is ________. A) the premium paid; unlimited. B) unlimited; the premium paid. C) unlimited; the value of the underlying asset. D) unlimited; unlimited. 40) Which of the following is NOT true for the writer of a call option? A) The gain or loss is equal to but of the opposite sign of the buyer of a call option. B) The maximum loss is unlimited. C) The maximum gain is unlimited. D) All of the above are true. TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. 41) The writer of the option is referred to as the seller, and the buyer of the option is referred to as the holder. 42) Foreign currency options are available both over-the-counter and on organized exchanges. 43) Andrea Cujoli is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ and the 6-month forward rate is ¥128.53/$. Andrea would earn a higher rate of return by buying yen and a forward contract than if she had invested her money in 6-month US Treasury securities at an annual rate of 2.50%. 44) Other things equal, the price of an option goes up as the volatility of the option decreases. 45) Which of the following is NOT a factor in determining the premium price of a currency option? A) The standard deviation of the daily spot price movement. B) The time to maturity. C) The present spot rate. D) All of the above are factors in determining the premium price. 46) The ________ of an option is the value if the option were to be exercised immediately. It is the options ________ value. A) time value; maximum B) intrinsic value; maximum C) intrinsic value; minimum D) time value; minimum 47) Assume that a call option has an exercise price of $1.50/³. At a spot price of $1.45/³, the call option has ________. A) an intrinsic value of $0.00. B) an intrinsic value of -$0.04. C) a time value of $0.04. D) a time value of $0.00. 48) The single largest interest rate risk of a firm is ________. A) accounts payable B) debt service C) dividend payments D) interest sensitive securities 49) The most widely used reference rate for standardized quotations, loan agreements, or financial derivative valuations is the ________. A) federal funds rate B) LIBOR C) Federal Reserve Discount rate D) one-year U.S. Treasury Bill 50) LIBOR is an acronym for A) Least Interest Bearing: Official Rate. B) Latest Interest Being Offered Rate. C) London Interbank Offered Rate. D) Large International Bank Offered Rate. 51) The following would be an example of a policy, not a goal. A) Management shall maximize shareholder's wealth. B) Management will hire only happy employees. C) Management will not write uncovered options. D) Management shall minimize the firm's overall weighted average cost of capital. 57) An interbank-traded contract to buy or sell interest rate payments on a notional principal is called a/an ________. A) forward rate agreement B) interest rate swap C) interest rate future D) none of the above 58) A/an ________ is a contract to lock in today interest rates over a given period of time. A) interest rate future B) forward rate agreement C) interest rate swap D) none of the above 59) An agreement to exchange interest payments based on a fixed payment for those based on a variable rate (or vice versa) is known as a/an ________. A) interest rate future B) interest rate swap C) forward rate agreement D) none of the above 60) An agreement to swap the currencies of a debt service obligation would be termed a/an ________. A) interest rate swap B) currency swap C) forward swap D) none of the above 61) Johnson Industries is currently paying a variable rate loan and desires greater certainty with regard to their loan payments. Refinancing is currently not available so they decide to pursue an interest rate swap agreement. Which of the following will help Johnson stabilize their anticipated cash outflows? Enter into an agreement to: A) Receive a quoted rate and pay LIBOR + 1.50%. B) Receive LIBOR and pay LIBOR + 1.50%. C) Receive LIBOR and pay a quoted rate. D) None of the above will help Johnson Industries pay a fixed amount for their obligations.

Explanation / Answer

1) LIBOR

2) interbank and client markets

3) speculators; arbitragers

4) brokers; dealers

5) $3,200 billion; day

6) Strip transactions

7) U.S. dollar, Japanese yen, euro, and U.K. pound

8) selling pounds forward; buying dollars forward

9) spot against forward

10) rate; quote

11) European terms; American terms

12)

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