Currency Hedging - Quiz International Finance

Kalons, Inc. is a U.S.-based MNC (Multinational company) that frequently imports raw materials from Canada. Kalons is typically invoiced for these goods in Canadian dollars and is concerned that the Canadian dollar will appreciate in the near future. Which of the following is not an appropriate hedging technique under these circumstances?

• A) purchase Canadian dollars forward.

• B) purchase Canadian dollar futures contracts.

• C) purchase Canadian dollar put options.

• D) purchase Canadian dollar call options.

The one-year forward rate of the British pound is quoted at $1.60, and the spot rate of the British pound is quoted at $1.63. The forward ____ is ____ percent.

• A) discount; 1.9

• B) discount; 1.8

• C) premium; 1.9

• D) premium; 1.8

The 90-day forward rate for the euro is $1.07, while the current spot rate of the euro is $1.05. What is the annualized forward premium or discount of the euro? Hint: It’s only 90 days….

• A) 1.9 percent discount.

• B) 1.9 percent premium.

• C) 7.6 percent premium.

• D) 7.6 percent discount.

Currency futures contracts sold on an exchange:

• A) contain a commitment to the owner, and are standardised.

• B) contain a commitment to the owner, and can be tailored to the desire of the owner.

• C) contain a right but not a commitment to the owner and can be tailored to the owner’s desire.

• D) contain a right but not a commitment to the owner, and are standardised.

Forward contracts:

• A) contain a commitment to the owner, and are standardised.

• B contain a commitment to the owner, and can be tailored to the desire of the owner.

• C) contain a right but not a commitment to the owner, can be tailored to the desire of the owner.

• D) contain a right but not a commitment to the owner, and are standardised.

A French exporter with a dollar claim fears a significant fall in the US currency. To hedge against this risk, without losing the opportunity to benefit from a rise, the exporter :

• A) Buy a euro/dollar put option

• B) Buy a dollar/euro put option

• C) Sell a dollar/euro put option

• D) Sell a euro/dollar put option

• E) Buy a euro/dollar call option

In order to protect itself effectively against a very significant rise in the euro, an American importer with a debt in this currency must :

• A) Buy EUR/USD call option

• B) Buy a USD/EUR call option

• C) Buy a EUR/USD put option

• D) Sell a EUR/USD call option

• E) Sell a EUR/USD put option

Which of the following is correct ?

• A) The longer the time to maturity, the less the value of a currency call option, other things being equal elsewhere.

• B) The longer the time to maturity, the less the value of a currency put option, other things being equal elsewhere

• C) The higher the spot rate relative to the exercise price, the greater the value of a currency put option, other things being equal elsewhere.

• D) The lower the exercise price relative to the spot rate, the greater the value of a currency call option, other things being equal elsewhere.

In order to protect itself against exchange rate risk, an American exporter holding a 3-month receivable in euro sells a EUR/USD call option at the exchange rate at a strike price of EUR 1 = USD 0.94. The present spot rate is EUR/USD = 1,000. The option costs 4 cents (i.e., USD 0.04). 3 months later, the spot exchange rate is EUR 1 = USD =0.96. After the hedging operation ends the exporter will be left with :

• A) A cost of 6 cents per euro

• B) A cost of 4 cents per euro

• C) A cost of 2 cents per euro

• D) A gain of 6 cents per euro

• D) A gain of 4 cents per euro

A European importer wishing to protect himself against a rising dollar buys a zero premium option (or zero premium). This operation consists for him in :

• A) To buy a USD/EUR call and sell a USD/EUR put

• B) To buy a USD/EUR call and to sell a USD/EUR call

• C) To buy a USD/EUR put and sell a USD/EUR call

• D) To buy a USD/EUR put and to sell a USD/EUR put