Study questions 14

1.   A major difference between the spot market and the forward market is that the spot market deals with:

A.   The immediate delivery of currencies

B.   The merchandise trade account
C.   Currencies traded for future delivery
D.   Hedging of international currency risks

2.   If Canadian speculators believed the Swiss franc was going to appreciate against the U.S. dollar, they
would

A.   Purchase Canadian dollars

B.   Purchase U.S. dollars
C.   Purchase Swiss francs
D.   Sell Swiss francs

3.   Suppose that an umbrella costs USD 20 in Atlanta, and the USD/CAD exchange is 0.84. How many CAD
do you need to buy the umbrella in Atlanta?

A.   CAD 23.81
B.   CAD 16.80
C.   None of the above

4.   Given the bid-ask quotes for JPY/GBP 220-240, calculate for:

Mr. Emil purchase GBP?

Mr. Cagatay sell GBP?

Mrs. Mirengiz purchase JPY?

Mrs. Aybaniz sell JPY?

5.   You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate is quoted as $1.20
= €1.00 and the dollar-pound exchange rate is quoted at $1.80 = £1.00. If a bank quotes you a cross rate of
£1.00 = €1.50 how much money can an smart trader make?

A. No arbitrage is possible
B. $1,160,000
C. $500,000
D. $250,000

6.   You are a U.S.-based treasurer with $1,000,000 to invest. The dollar-euro exchange rate is quoted as $1.60
= €1.00 and the dollar-pound exchange rate is quoted at $2.00 = £1.00. If a bank quotes you a cross rate of
£1.00 = €1.20 how much money can an astute trader make?

A. No arbitrage is possible
B. $1,160,000
C. $41,667
D. $40,000
 7.   The forward price

A. may be higher than the spot price.

B. may be the same as the spot price.
C. may be less than the spot price.
D. all of the above

8.   The current spot exchange rate is $1.55/€ and the three-month forward rate is $1.50/€. You enter into a
short position on €1,000 for three month forward. At maturity, the spot exchange rate is $1.60/€. How
much have you made or lost?

A. Lost $100
B. Made €100
C. Lost $50
D. Made $150

9.   Consider a trader who takes a long position in a six-month forward contract on the euro. The forward rate is
$1.75 = €1.00; the contract size is €62,500. At the maturity of the contract the spot exchange rate is $1.65 =
€1.00.

A. The trader has lost $625.

B. The trader has lost $6,250.
C. The trader has made $6,250.
D. The trader has lost $66,287.88.
 10.   Using the table, what is the Canadian dollar-euro spot cross-exchange rate?

11.   Using the table what is the 6-month forward pound-yen cross-exchange rate?

12.   Using the table, what is 3-month forward depreciation or aprication (expressed as an annual percentage
rate) for the British pound in terms of U.S. dollars?

13.   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.

14.   In which market does a clearinghouse serve as a third party to all transactions?

A. Futures
B. Forwards
C. Swaps
D. None of the above

15.   Find the cross rates for each currency

US Euro UK Switzarland Mexico Japan Canada

Canada &&&&&&&&&&& &1.0656
0) Japan &&&&&&& &102.4900
Mexico &&&&&&&&& &13.1340
Switzarland &&&&&&&&&&& &0.9026
UK &&&&&&&&&&& &0.6107
Euro &&&&&&&&&&& &0.7357
US &&&&&&&&&&& &1.0000

16.   4) A contract that calls for the investor to (possibly) buy securities on a future date is called a ________.
A) short contract
B) long contract
C) hedge
D) cross

17.   With a long contract, the investor (may)

A) sell securities in the future.

B) buy securities in the future.
C) hedge in the future.
D) close out his position in the future.
 18.   If you sell a short contract on financial futures, you hope interest rates will ________.

A) rise
B) fall
C) not change
D) fluctuate

19.   The advantage of forward contracts over futures contracts is that forward contracts

A) are standardized.
B) have lower default risk.
C) are more liquid.
D) are none of the above.

20.   The advantage of forward contracts over futures contracts is that forward contracts

A) are standardized.
B) have lower default risk.
C) are more flexible.
D) both A and B are true.