INTERNATIONAL FINANCE
Assignment Problems (6) Name: Student#:
I. Choo the correct answer for the following questions (only correct answer) (3 credits for each question, total credits 3 x 20 = 60)
1. Which of the following is NOT true regarding forward contracts?
A. The maturity of forward contracts is flexible.
B. Forward contracts are traded both on organized exchanges and OTC market.
C. Forward contracts are ud to speculate the discrepancies of the exchange rates.
D. The size of a forward contract is usually much larger than that of the futures or options.
2. Which of the following is NOT a contract specification for currency futures trading on an organized exchange?
A. maturity date
B. maintenance margin requirement
C. size of the contract
D. All of the above are specified
3. A futures contract is very similar to a forward contract, becau __________.
A. both are agreements between two parties to deliver relative currencies at a certain time for a certain price
B. both are standardized contracts
C. both can be ud to eliminate the default risk
D. both are required to physically deliver the underlying currency
4. If the amount in the margin account drops below the maintenance margin, the futures contract holder will __________.
A. clo out the contract
B. be issued a margin call
C. write a new contract
D. notify the exchange
5. Which of the following is NOT a difference between a currency futures contract and a forward contract?
A. The counterparty to the futures participant is unknown with the clearinghou stepping into each transaction whereas the forward contract participants are in direct contact tting the forward specifications.
B. A single sales commission covers both the purcha and sale of a futures contract whereas there is no specific sales commission with a forward contract becau banks earn a profit through the bid-ask spread.
C. The futures contract is marked to market daily whereas a forward contract is only due to be ttled at maturity.
D. All of the above are differences between a currency futures contract and a forward
contract.
6. Assume that Citibank in New York quotes a 30-day forward rate on euro of $0.7533 while the Singapore International Monetary Exchange (SIMEX) euro futures for delivery in 30 days is being quoted at $0.7522. You can make a riskless profit by __________.
A. taking a short position on euro in SIMEX euro futures contract and a long position on euro in the forward contract
B. taking a long position on euro in SIMEX euro futures contract and a short position on euro in the forward contract
C. taking a short position on dollar in SIMEX euro futures contract and a short position on dollar in the forward contract
D. taking a long position on dollar in SIMEX euro futures contract and a long position on dollar in the forward contract
7. The main function of the “Marking to market” procedure comes down to __________.
A. avoid default risk inherent in forward contracts
B. cover risk exposure arin from the international transactions
C. protect the contract holders from suffering the loss
D. all of the above
8. The buyer of a futures contract is required to put a sum of money in the exchange. This sum of money is called __________.
A. down payment
B. initial margin
C. premium
D. commission
9. When reading the futures quotation in the newspaper, the column heading indicating the number of contracts outstanding on the previous day is called __________.
A. percentage change
B. ttle
C. open interest
D. estimated volume
10. A put option on Japane yen is written with a strike price of ¥ 88/$. Which of the following spot rate maximizes your profit if you choo to execute the contract before maturity?
A. ¥70/$
B. ¥80/$
C. ¥90/$
D. ¥100/$
11. The agreed price in a currency option contract is called the __________.
A. forward price
B. futures price
C. exerci price
D. spot price
12. For a currency put option if the future spot rate is above the strike price, the option is said to be __________.
A. in-the-money
B. at-the-money
C. out-of-the-money
D. break-even
13. The writer of an option contract has __________ whereas the holder has __________.
A. obligation; choice
B. right; responsibility
C. choice; obligation
D. priority; privilege
14. Assume you bought a call option with the exerci price of $1.55/₤ in Chicago Mercantile Exchange on September 6. The contract would be expired in December. If the spot exchange rate was $1.50/₤ on October 10, the intrinsic value of this call option on that day would be __________.
A. $0.05
B. -$0.05
C. $0
D. None of the above, becau the contract doesn’t expire on October 10.
15. The foreign-currency accounts payable can be hedged by buying a __________ option on the foreign currency, whereas accounts receivable can be hedged by buying a __________ option on the foreign currency.
A. call; put
B. put; call
C. American; European
D. European; American
16. Mr. Bull tries to speculate on the direction of the entire stock market, the most efficient method he should u is to acquire __________.
A. a stock index futures
B. a portfolio containing stocks of all traded companies
C. a currency forward contract
D. a currency futures contract
17. The amount that the option purchar must pay to obtain an option contract may be described as option __________.
A. cost
B. premium
C. price
D. All of the above
18. A Canadian dollar option quoted as “C$ Sep 9800 put” is lling on the CME at a price of $0.0026/C$. The size of the contract is C$100,000. Assume the spot exchange rate on the maturity day turns out to be $0.95/C$. You will have __________ if you hold 10 contracts.
A. $30,000 net profit
B. $30,000 net loss
C. $27,400 net profit
D. $27,400 net loss
19. A fixed-to-fixed currency swap is ud to __________.
A. hedge currency risk
B. speculate discrepancies of the exchange rate
C. make a riskless profit
D. All of the above
20. Exxon and Cha Manhattan Bank reached an agreement. In the next two years, Exxon would pay fixed price of oil to Cha Manhattan Bank on June 30, and Cha Manhattan Bank would pay floating price of oil according to the spot price on the same day. This is an example of __________.
A. fixed-for-floating currency swap
B. commodity swap
C. swaption
D. equity swap
II. Problems (40 Credits)
1. Samuel Samosir trades currencies for Peregrine Funds in Jakarta, Indonesia. He focus nearly all of his time and attention on the U.S. dollar/Singapore dollar ($/S$) exchange rate. The current sp
ot rate is $0.6000/S$. After considerable study this week, he has concluded that the Singapore dollar will appreciate versus the U.S. dollar in the coming 90 days, probably to about $0.7000/S$. He has the following options on the Singapore dollar to choo from: (3 credits for each question, total credits 3 x 5 = 15 credits)
a. Should Samuel buy a put on Singapore dollars or a call on Singapore dollar?
b. Using your answer to part a, what is Samuel’s break-even price?
c. Using your answer to part a, what is Samuel’s gross profit and net profit (including the premium) if the spot rate at the end of the 90 days is indeed $0.7000/S$?
d. Using your answer to part a, what is Samuel’s gross profit and net profit (including the premium) if the spot rate at the end of the 90 days is indeed $0.8000/S$?
e. Using your answer to part a, what is the contract’s time value at the end of the 90 days?
2. Jennifer Magnusn, a currency trader for Chicago-bad Black River Investments, us the futures quotes below on the British pound to speculate on its value: (5 credits for each question, total credits 4 x 3 = 12 credits)
a. If Jennifer buys 5 June pound futures right after CME opens, and the spot rate at maturity is $1.3980/pound, what is the value of her position?
b. If Jennifer lls 12 March pound futures with the opening quote, and the spot rate at maturity is $1.4560/pound, what is the value of her position?
