IF - Chapter 7 - Foreign Currency Derivatives

Financial derivatives are powerful tools that can be used by management for purposes of:

• speculation.

• hedging.

• human resource management.

• A and B above

A foreign currency ________ contract calls for the future delivery of a standard amount of foreign exchange at a fixed time, place, and price.

• futures

• forward

• option

• swap

Which of the following is NOT a contract specification for currency futures trading on an organized exchange?

• size of the contract

• maturity date

• last trading day

• All of the above are specified.

About ________ of all futures contracts are settled by physical delivery of foreign exchange between buyer and seller.

• 0%

• 5%

• 50%

• 95%

Futures contracts require that the purchaser deposit an initial sum as collateral. This deposit is called a:

• collateralized deposit.

• marked market sum.

• margin.

• settlement.

A speculator in the futures market wishing to lock in a price at which they could ________ a foreign currency will ________ a futures contract.

• buy; sell

• sell; buy

• buy; buy

• none of the above

A speculator that has ________ a futures contract has taken a ________ position.

• sold; long

• purchased; short

• sold; short

• purchased; sold

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?

• Sell a pound currency futures contract.

• Buy a pound currency futures contract.

• Sell pounds today.

• Sell pounds in six months.

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?

• $937.50 loss

• $937.50 gain

• £937.50 loss

• £937.50 gain

Which of the following statements regarding currency futures contracts and forward contracts is NOT true?

• A futures contract is a standardized amount per currency whereas the forward contact is for any size desired.

• A futures contract is for a fixed maturity whereas the forward contract is for any maturity you like up to one year.

• Futures contracts trade on organized exchanges whereas forwards take place between individuals and banks with other banks via telecom linkages.

• All of the above are true.