1. When currency options are standardized and traded on the Chicago Mercantile Exchange (as opposed to traded over-the-counter), there is ___________ liquidity and a _____________ bid/ask spread.

a. less; wider

b. less; narrower

c. more; wider

d. more; narrower

2. Assume a simple world in which the United States exports beer to France and imports wine from France. If the United States imposes large tariffs on the French wine, what is the likely long-term impact (after retaliation) on the values of U.S. beer firms, U.S. wine firms, French beer firms, and French wine firms?

a. both countries beer producers will be harmed and both countries wine producers will benefit

b. U.S. wine firms and French beer firms will benefit while U.S. beer firms and French wine firms will be harmed

c. Both countries wine and beer producers will be harmed

d. U.S. wine firms and French beer firms will be harmed while U.S. beer firms and French wine firms will benefit

e. both countries beer producers will benefit and both countries wine producers will be harmed

3. If your firm expects the euro to appreciate more than the market expects, it could speculate by __________ euro call options or __________ euros forward in the forward exchange market

a. purchasing; purchasing

b. purchasing; selling

c. selling; purchasing

d. selling; selling

4. If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it will receive C$200,000 in 90 days from a Canadian customer, it could:

a. sell Canadian dollars 90 days from now at the spot rate

b. purchase Canadian dollars 90 days from now at the spot rate

c. obtain a 90 day forward sale contract on Canadian dollars

d. obtain a 90 day forward sale contract on U.S. dollars

e. obtain a 90 day forward purchase contract on Canadian dollars

5. In term of volume, the bulk of foreign currency transactions are handled by:

a. the Central Banks in each country.

b. airports.

c. large banks.

d. government agencies such as the International Monetary Fund.

e. hotels and retailers.

6. Which strategy might be used to take advantage of a currency that is expected to depreciate?

a. sell a currency call option

b. sell a currency put option

c. buy a currency call option

d. buy a currency futures contract