Question

1.

A U.S. company has international operations, with revenue of 1,000,000 Euro expected in one year. To hedge this revenue with a futures contract, the company should

		Short Euro futures
		Buy Euro futures

2.

Which of the Greeks measures the sensitivity of option price to the interest rate?

		rho
		gamma
		vega
		theta

3.

Exchange rate is currently $0.7 US per 1 Canadian dollar. Interest rate is 2% in the US and 1% in Canada. A company has entered a futures contract to buy 1,000,000 Canadian dollars for $710,000 U.S. in one year. Which of the following statements is correct?

		The company has contracted to buy Canadian dollars at the expected future exchange rate
		The company has contracted to buy Canadian dollars above the expected future exchange rate
		The company has contracted to buy Canadian dollars below the expected future exchange rate

4.

The bond that gets to be delivered to the CDS seller in in the event of default is referred to as:

		Reference entity
		Cheapest to deliver bond

Answer 1

1.short euro futures

As the company needs to convert Euro into dollar after a year

2.the answer is rho

Rho meaures sensitivity of option price to interest rates

Delta measures sensitivity of option price to price in underlying asset

Gamma measures sensitivity with respect to delta

3

Expected exchange rate = Spot rate*(1+INTEREST rate US)/(1+ Interest rate Canada)

=0.7(1+2%)(1+1%)

=$0.7069/Can $

Contracted ratw =$7.1

Hence, the company has contracted to buy above the expected future rate

Reference entity