Question 1: Which of the following is NOT true for the writer of a put option?
a.-The maximum loss is limited to the strike price of the underlying asset less the premium.
b.-The gain or loss is equal to but of the opposite sign of the buyer of a put option.
c.-The maximum gain is the amount of the premium.
d.-All of the above are true.
Question 2.- A call option on euros is written with a strike price of $1.30. Which spot price maximizes your profit if you choose to exercise the option before maturity?
a.-$1.20
b.-$1.25
c.-$1.30
d.-$1.35
Question 3.- Which of the following is the most likely strategy for a U.S. firm that will be receiving Swiss francs in the future and desires to avoid exchange rate risk (assume the firm has no offsetting position in francs)?
a.- purchase a call option on francs.
b.- sell a futures contract on francs.
c.- obtain a forward contract to purchase francs forward
d.-all of the above are appropriate strategies for the scenario described.
Question 4.- Losses from __________ exposure generally reduce taxable income in the year they are realized. __________ exposure losses are not cash losses and therefore, are not tax deductible.
a.- transaction; Operating
b.- accounting; Operating
c.- accounting; Transaction
d.- transaction; Accounting
Question 5.- Plains States Manufacturing has just signed a contract to sell agricultural equipment to Boschin, a German firm, for 1,250,000. The sale was made in June with payment due six months later in December. Because this is a sizable contract for the firm and because the contract is in Euros rather than dollars, Plains States is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information.
The spot exchange rate is $0.8924
The six month forward rate is $0.8750
Plains States' cost of capital is 11%
The Euro zone 6-month borrowing rate is 9% (or 4.5% for 6 months)
The Euro zone 6-month lending rate is 7% (or 3.5% for 6 months)
The U.S. 6-month borrowing rate is 8% (or 4% for 6 months)
The U.S. 6-month lending rate is 6% (or 3% for 6 months)
December put options for 625,000; strike price $0.90, premium price is 1.5%
Plains States' forecast for 6-month spot rates is $0.91
The budget rate, or the lowest acceptable sales price for this project, is $1,075,000 or $0.86
If Plains States purchases the put option, and the option expires in six months on the same day that Plains States receives the 1,250,000, the firm will exercise the put at that time if the spot rate is $0.91.
a.-True
b.-False
Question 6.-Which of the following statements are correct about economic exposure?
a.-Transaction exposures to exchange rates, interest rates, and commodity prices over the short-to-medium run are an integral part of economic exposure.
b.-Managing the strategic implications of all changing macroeconomic variables cannot be accomplished using only the financial markets.
c.-Effective economic exposure management must be based on strategic operating decisions made mainly by marketing and production managers in response to expected changes in input and output prices, and the impact of changing demand for the company's products.
d.-All of the statements above are correct.
e.- Only statements b and c are correct.
Question 7.-Management must be able to predict disequilibria in international markets to take advantage of diversification strategies.
a.-True
b.-False