Question
A) Suppose you receive 2,500,000 British Pounds (not Euros) today and plan to convert into US dollars early next February. Which is the correct action
A) Suppose you receive 2,500,000 British Pounds (not Euros) today and plan to convert into US dollars early next February. Which is the correct action to take today in order to hedge against GBP exchange rate risk?
Short 20 British Pounds futures contracts expiring in February
Long 20 British Pounds futures contracts expiring in March
Short 40 British Pounds futures contractsexpiring in March
Long 40 British Pounds futures contracts expiring in February
B)If the volatility is 30%, then the stock price will move up by 30% or down by 30% next period. TRUE OR FALSE?
C. When comparing option hedging (hedging with options) to futures hedging (hedging with futures), which statement is most true:
Option hedging allows for smaller variability in the end value than futures hedging. |
Futures hedging protects against downside risk but allows for upside potential. |
Futures hedging is more expensive than option hedging because the latter is settled in cash. |
Option hedging protects against downside risk but is typically more expensive than futures hedging. |
D)Which of the following statements is correct about the early exercise of American options?
It is always optimal to exercise an American call option on a non-dividend-paying stock before the expiration date. |
It can be optimal to exercise an American put option on a non-dividend-paying stock early. |
It can be optimal to exercise an American call option on a non-dividend-paying stock early. |
It is never optimal to exercise an American put option on a non-dividend-paying stock before the expiration date. |
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