Question :
MULTIPLE CHOICE
1.Why might a financial manager prefer using option contracts : 1325827
MULTIPLE CHOICE
1.Why might a financial manager prefer using option contracts instead of futures or forward contracts to hedge?
a.Futures and forwards require a premium be paid up front, while options do not.
b.Options provide protection against adverse price movements but allow the user to profit if the price of the underlying asset moves favorably.
c.Options create an obligation to perform, while futures and forwards do not.
d.Futures and forwards all have greater default risk than options.
2.Suppose rising gas prices cut into consumer spending, and Wal-mart, Target, and other retailers experience a slow-down in sales. This slow-down is an example of
a.an economic exposure
b.a transaction exposure
c.a translation exposure
d.an alternatives exposure
3.Which of the following is NOT a motivation for hedging?
a.Reducing the costs of financial distress
b.Enhancing the ability to evaluate managers
c.Offsetting the costs of insurance
d.Reducing the firm’s expected tax liability
4.Which of the following is a (are) key difference(s) a manager should note in choosing between forward and futures contracts?
a.Exchange trading makes forward contracts more liquid.
b.Futures contracts carry standardized terms, while forward contracts can be tailored to meet specific needs.
c.Futures contracts have greater default risk than forward contracts.
d.Forward contracts require initial margin deposits and daily marking to market, while futures do not.
5.A standard “fixed for floating” interest rate swap contract is effectively
a.a series of call options on the interest rate.
b.a series of put options on the interest rate.
c.a series of forward rate agreements.
d.none of the above.
6.The spot rate on the British pound is 0.5491 per U.S. dollar, while the risk-free borrowing rates are 4% in Britain and 3% in the United States. What is the “fair” forward exchange rate?
a.0.5438 pounds per dollar
b.0.7321 pounds per dollar
c.0.4118 pounds per dollar
d.0.5544 pounds per dollar
7.The Exim Company has entered into a 3 month, $250 million notional principal forward rate agreement (FRA) with What-a-Bank. The terms are such that Exim will pay What-a-Bank if LIBOR is above 2%, but What-a-Bank will pay Exim if LIBOR is below 2%. Based on the standard FRA formula, who will pay and how much, if LIBOR is 1.625% in three months?
a.Exim Company pays $1,244,942
b.Exim Company pays $233,427
c.What-a-Bank pays $1,244,924
d.What-a-Bank pays $233,427
8.You are a financial manager with ICN, Co. and you have used a forward contract to hedge a yen 100,000,000 payment the company expects in 90 days. Your contract calls for you to deliver yen at 111.25 yen per U.S. dollar. Suppose the spot rate at that time is 109.75 yen per U.S. dollar. Did you gain or lose on the hedge? How much?
a.Gain, $12,285.33
b.Loss, $12,285.33
c.Gain, $66,666.67
d.Loss, $66,666.67
9.Outsource, Inc. expects a payment from a French customer in thirty days. To hedge its currency exposure, Outsource should
a.Sell euros forward thirty days.
b.Buy euros forward thirty days.
c.Sell dollars forward thirty days.
d.Do nothing as there is no foreign exchange rate exposure for a thirty day time horizon.
10.You are a financial manager with JCN, Co. and you have used a forward contract to hedge a yen 100,000,000 payment the company expects to receive in 90 days. Your contract calls for you to deliver yen at 109.75 yen per U.S. dollar. Suppose the spot rate at that time is 111.25 yen per U.S. dollar. Did you gain or lose on the hedge? How much?
a.Gain, $66,666.67
b.Loss, $66,666.67
c.Gain, $12,285.33
d.Loss, $12,285.33
11.The Exim Company has entered into a 3 month, $250 notional principal forward rate agreement (FRA) with What-a-Bank. The terms are such that Exim will pay What-a-Bank if LIBOR is above 2%, but What-a-Bank will pay Exim if LIBOR is below 2%. Based on the standard FRA formula, who will pay and how much, if LIBOR is 2.375% in three months?
a.Exim Co. pays, $1,475,614
b.Exim Co. pays, $232,992
c.What-a-Bank pays, $1,475,614
d.What-a-Bank pays, $232,992
12.If the spot exchange rate is 110 yen per U.S. dollar, the “fair” forward exchange rate is 115 yen per U.S. dollar, and the risk-free borrowing rate in the United States is 2.5%, what must the risk-free borrowing rate be in Japan?
a.7.2%
b.5.6%
c.3.7%
d.0%
