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/$; 0.699/$ TABLE 6.1 Use the table to answer following question(s). 15) Refer to Table 6.1. The current spot rate of dollars per pound as quoted in a newspaper is ________ or ________. A) $1.4481/; 0.6906/$ B) 1.4484/$; $0.6904/ C) 1.4487/$; $0.6903/ D) $1.4484/; 0.6904/$ 16) Refer to Table 6.1. The one-month forward bid price for dollars as denominated in Japanese yen is ________. A) 129.62/$ B) -18 C) -20 D) 129.74/$ 17) Refer to Table 6.1. The ask price for the two-year swap for a British pound is ________. A) -$230 B) $1.4257/ C) -$238 D) $1.4250/ 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) $937.50 loss 26) A foreign currency ________ option gives the holder the right to ________ a foreign currency whereas a foreign currency ________ option gives the holder the right to ________ an option. A) call, sell, put, buy B) put, hold, call, release C) call, buy, put, sell D) none of the above 27) An option whose exercise price is equal to the spot rate is said to be ________. A) in-the-money B) at-the-money C) on-the-spot D) out-of-the-money 28) A call option whose exercise price exceeds the spot price is said to be ________. A) over-the-spot B) in-the-money C) out-of-the-money D) at-the-money TABLE 8.1 Use the below mentioned table to answer following question(s). April 19, 2009, British Pound Option Prices (cents per pound, 62,500 pound contracts). 29) Refer to Table 8.1. What was the closing price of the British pound on April 18, 2009? A) 1.448/$ B) $14.48/ C) $1.448/ D) None of the above 30) Refer to Table 8.1. The exercise price of ________ giving the purchaser the right to sell pounds in June has a cost per pound of ________ for a total price of ________. A) 1450; 1.02 cents; $637.50. B) 1440; 1.42 cents; $887.50. C) 1460; 0.68 cents; $425.00. D) 1440; 1.06 cents; $662.50. 31) Dash Brevenshure works for the currency trading unit of ING Bank in London. He speculates that in the coming months the dollar will rise sharply vs. the pound. What should Dash do to act on his speculation? A) Sell a put on the pound. B) Buy a put on the pound. C) Sell a call on the pound. D) Buy a call on the pound. 32) A put option on yen is written with a strike price of 105.00/$. 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/. At a spot price of $1.45/, 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. TABLE 9.1 Use the information for Polaris Corporation to answer following question(s). Polaris is taking out a $5,000,000 two-year loan at a variable rate of LIBOR plus 1.00%. The LIBOR rate will be reset each year at an agreed upon date. The current LIBOR rate is 4.00% per year. The loan has an upfront fee of 2.00% 52) Refer to Table 9.1. What is the all-in-cost (i.e., the internal rate of return) of the Polaris loan including the LIBOR rate, fixed spread and upfront fee? A) 5.00% B) 5.53% C) 4.00% D) 6.09% 53) Refer to Table 9.1. What portion of the cost of the loan is at risk of changing? A) the upfront fee B) the spread C) the LIBOR rate D) all of the above 54) Refer to Table 9.1. If the LIBOR rate jumps to 5.00% after the first year what will be the all-in-cost (i.e. the internal rate of return) for Polaris for the entire loan? A) 6.58% B) 5.50% C) 6.09% D) 5.25% 55) Refer to Table 9.1. If the LIBOR rate falls to 3.00% after the first year what will be the all-in-cost (i.e. the internal rate of return) for Polaris for the entire loan? A) 4.00% B) 4.50% C) 5.60% D) 5.25% 56) Refer to Table 9.1. Polaris could have locked in the future interest rate payments by using A) an interest rate future. B) a forward rate agreement. C) an interest rate swap. D) any of the above 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.