Question

1. Which of the following statements regarding futures contracts is false?

a)      Both the buyer and the seller can get out of the contract at any time by selling it to a third party at the current market price.

b)      Futures prices are not prices that are paid today. Rather, they are prices agreed to today, to be paid in the future.

c)      Futures contracts are traded anonymously on an exchange at a publicly observed market price and are generally very illiquid.

d)      Traders are required to post collateral, called margin, when buying or selling commodities using futures contracts.

2. Which of the following statements is false?

a)      Currency options allow firms to lock in a future exchange rate; currency forward contracts allow firms to insure themselves against the exchange rate moving beyond a certain level.

b)      Generally speaking, cash-and-carry strategies are used primarily by large banks, which can borrow easily and face low transaction costs.

c)      Currency options, like stock options, give the holder the right—but not the obligation—to exchange currency at a given exchange rate.

d)      Many managers want the firm to benefit if the exchange rate moves in their favor, rather than being stuck paying an above-market rate.

3. Which of the following statements regarding currency options is false?

a)      Firms often prefer forward contracts to currency options if the transaction they are hedging might not take place.

b)      Currency options are another method that firms commonly use to manage exchange rate risk. Currency options, like stock options, give the holder the right—but not the obligation—to exchange currency at a given exchange rate.

c)      Currency forward contracts allow firms to lock in a future exchange rate; currency options allow firms to insure themselves against the exchange rate moving beyond a certain level.

d)      Many managers want the firm to benefit if the exchange rate moves in their favour, rather than being stuck paying an above-market rate.

4. In December 2005, the spot exchange rate for the British Pound was USD 1.7188 / GBP and the one-year forward rate was USD 1.8675 / GBP. Suppose that at the same time Malacantra Restaurants, Inc. (MRI) entered into a contract to purchase goods with a price of GBP 375,000 to be delivered in one year. Simultaneously MRI entered into a one-year forward contract to purchase GBP 375,000. At the time the contract payment was due, the spot exchange rate was USD 1.9975 / GBP. What is the amount of the payment in U.S. dollars that MRI paid?

a)      USD 700,312.50

b)      USD 644,550.00

c)      USD 749,062.50

d)      USD 200,803.20

5. In June 2016, the spot exchange rate for the British Pound was USD 1.4255 / GBP. Suppose that at the same time Malacantra Restaurants, Inc. (MRI) entered into a contract to purchase goods with a price of GBP 400,000 to be delivered in one year. There is a one-year option call contract available to MRI which will allow the company to purchase GBP 10,000 for USD 1.50 / GBP. If MRI purchases 40 option contracts, and the spot rate at the time the contract is due is USD 1.8725 / GBP, how much will MRI pay for the goods?

a)      USD 570,200.00

b)      USD 266,666.70

c)      USD 600,000.00

d)      USD 749,000.00

6. In June 2016, the spot exchange rate for the British Pound was USD 1.4255 / GBP. Suppose that at the same time Malacantra Restaurants, Inc. (MRI) entered into a contract to purchase goods with a price of GBP 400,000 to be delivered in one year. There is a one-year option call contract available to MRI which will allow the company to purchase GBP 10,000 for USD 1.50 / GBP. If MRI purchases 40 option contracts, and the spot rate at the time the contract is due is USD 1.3465 / GBP, how much will MRI pay for the goods?

a)      USD 570,200.00

b)      USD 538,600.00

c)      USD 600,000.00

d)      USD 749,000.00

Answer 1

1.

Futures contracts is a standardize financial contract between two parties in which one party agree to buy or sell the commodity at a specific price and at a specific future date and the other party agree to make sell or purchase. physical delivery does not occur. in futures contract Traders are required to post collateral, called margin, when buying or selling commodities using futures contracts.

Both the buyer and the seller can get out of the contract at at end of time by selling it to a third party at the defined price

Statement is false.

2.

Currency options allow firms to lock in a future exchange rate; currency forward contractsallow firms to insure themselves against the exchange rate moving upto a certain level.

Statement (A) is false.