FINAL EXAM PREP FRM

FINAL EXAM PREPFRMQ & A14 June 20151. A company has recently purchased some stock of a competitor as a part of long-term plan to acquire the competitor. However it is somewhat concerned that the market price of this s tock could decrease over the short run. The company could hedge against the possible decline in the stocks market price by:Purchase a call option on that stock Purchase a put option on that stockSelling a put option on that stockObtaining a warrant option on the stock

2. When a firm finances each asset with a financial instrument of the same approximate maturity as the life of the asset, it is applying Working capital managementReturn maximizationFinancial leverageA hedge approach

3. If a call option is out-of-the-moneyA. It is not worth exercisingB. The value of the underlying asset is less than the exercise priceC. The option no longer existsD. Both A and B are correct

4. The type of option that does not have the backing of stock is called

Covered optionUnsecured optionNaked optionPut option

5. A contractual arrangement that gives the owner the right to buy or sell an asset at a fixed price at any moment in time before or on a specified date is

European optionForeign optionFuture optionAmerican option

6. The use of derivatives to either hedge or speculate results in

Increased risk regardless of motivesDecreased risk regardless of motivesOffset risk when hedging and increased risk when speculatingOffset risk when speculating and increased risk when hedging

7. A forward contract involves

A commitment today to purchase a product on a specific future date at a price to be determined sometime in futureA commitment today to purchase a product sometime during the current day at its present priceA commitment today to purchase a product on a specific future date at a price to be determined todayA commitment today to purchase a product only when its price increases above its current exercise price

8. An automobile company that uses the futures market to set the price of steel to protect against price increases is an example of

A short hedgeA long hedgeSelling futures to protect the company from lossSelling futures to protect against price declines

9. If a corporation holds a forward contract for the delivery of US Treasury bonds in 6 months and, during 6 months, interest rate declines, at the end of the 6 months the value of the forward contract will have

DecreasedIncreasedRemained constantAny of the answers may be correct

10. An American importer of English clothing has contracted to pay an amount fixed in British pounds three months from now. If the importer worries that the US Dollar may depreciate sharply against the British pound in the interim, it would be well advised to:

A. Buy pounds in the forward exchange marketB. Sell pounds in the forward exchange marketC. Buy dollars in the future marketD. Sell dollars in the futures market

11. If the annual US inflation rate is expected to be 5% while the Pk Rupee is expected to depreciate against the US dollar by 10%, a Pakistani firm importing from its US partner can expect its Rupee costs for these imports to:

A. Decrease by about 10%B. Decrease by about 5%C. Increase by about 5%D. Increase by about 15%100X1.05=105100x1.10=110110x1.05=115.5 =15%12. The risk that securities cannot be sold at a reasonable price on short notice is calledA. Default riskB. Interest ra te riskC. Purchasing power riskD. Liquidity risk

13. Which of the following are components of interest rate risk

A. Purchasing power risk and default riskB. Price risk and market riskC. Portfolio risk and reinvestment riskD. Price risk and reinvestment riskInt rate risk is the risk of fluctuations in the value of an asset due to change in int rate. Price risk is portrayed as a decline in the value of bonds as int rate increases .

14. Zubair & Co. , a Pak corp. is in possession of accounts receivables denominated in German deutsche marks. To what type of risk are they exposed?A. Liquidity riskB. Business riskC. Exchange rate riskD. Price risk

15. Business risk is the risk inherent in a firms operations that excludes financial risk. It depends on all of the following except:

A. Amount of financial leverageB. Sales price variabilityC. Demand variabilityD. Input price variability

16. If the spot rate of the German mark is $0.40 and the three month forward rate of the mark is $0.45, then the forward rate shows a premium of -----% on an annual basis35.6 40.5 50.0 [ (0.45-0.40)/0.40 ] x (360/90)=50% 52.7 55.5

17. If the spot rate of the French franc is $0.16 and the six month forward rate is $0.15 the forward rate shows a ------- of ------% on an annual basis.

discount; 11.5 premium; 11.5 premium; 12.5 discount; 12.5 [(0.15-0.16)/0.16]x360/180 =-12.5 discount; 0.3

18. If the German was worth $0.38 six month ago and is now worth $0.45 today, then the mark has ------- by ---------% on an annual basis.

appreciated ; about 37 [ (0.45-0.38)/0.38 ] x 12/6 = 37 appreciated; about 25 depreciated about 57 depreciated; about 28

19. Assume: a) you have $10,000 to invest, b)the current spot rate of Canadian dollar is $0.81; the 90 day forward rate is $0.80; the annual interest rate in the US is 4%; and the annual interest rate in Canada is 6%. Where would you invest your $10,000 to maximize your yield with no foreign exchange risk?

Canada USA does not make any difference cannot tell e. none of these

Invest in the US: $10,000 x 1.01=$10,100 (4%/4=1%) Invest in Canada and cover in the forward mkt Buy CAD at spot rate $10,000/0.81=CAD12,346 Invest in Canada: CAD 12,346 X 1.015=12,531 (6%/4=1.5%) Sell CAD forward: 12531 x 0.81 = $10,025US investment earning is $75 more than Canadian investment.

20. A currency futures contract differs from a commodity futures contract in the

future delivery date price quantity all of these none of these

21. The -------- margin is the amount market participants must deposit into their account at the time of entering in to a futures contract.maintenance initial Performance bond minimum none of these

22. The holder of a call option will benefit if the underlying currencys price --------- falls stabilize rises remains same

23. A call option with a strike price less the current spot price is said to be

profitable in-the-money out-of-the-money at-the-money none24. Who of the following does not have to pay an option premium?option buyer call option buyer put option buyer option writer a and b25. Any option with a positive intrinsic value is said to beprofitable in-the-money out-of-the-money at-the-money none

26. The holder of put option will benefit if the underlying currencys price falls stabilizes remains the same rises a put option holder will always benefit

27. The ------------------ margin is a set minimum margin customers must always maintain in their own accountmaintenance Initial performance bond minimum none

28. A US co. has an account receivables of 10,000,000 marks from a German co. to be paid in three months. The three months forward rate for the German mark is $0.50 per mark. The approximate value of the account receivable in US dollars, if the co. makes a forward hedge, will be $......20million 20.290million 5million [ $0.50xDM10m=$5,000,000 ] 5.5million 10.5million

29. Zubair enters a futures contract for September delivery (September19) of uk pound 62,500 on March 19. The future exchange rate is $ 1.65 per pound. He believes that the spot rate for pounds on September 19 will be $1.67 per pound. The margin requirement is two percent. If his expectations are correct, his annualized rate of return on investment will be. 250% 200% 150% 121% Investment = ukp 62500 x 1.65x 0.02= $2062.50 , Profit = ukp62500 (1.67-1.65) = $1250 Rate of return = 1250/2062.5 x 12/6 = 121%105%30. Assume that the current spot rate for the British pound is $1.65. A call option with a strike price of $1.62 is said to be--------in-the-money Profit 1.65 -1.62 = 0.03 out-of-the-money at-the-money above the money 31. Assume that the current spot rate for the British pound is $1.65. A put option with a strike price of $1.62 is said to bein-the-money out-of-the-money loss 1.62-1.65=0.03 at-the-money above the money 32. The call premium per Canadian dollar on April 19 is $0.04, the expiration date is September 19, and the strike price is $0.80. Bilal believes that the spot rate for the Canadian dollar will rise to $0.92 by September 19. If his expectations are correct, his profit from speculating three call options (Canadian $ 150,000) will be8,000 9,000 10,000 11,000 12,000 buy call option on March 19 -$0.04 exercise option on September19 -$0.80 sell the dollar on September 19 +$0.92 net profit +$0.08 net profit for 3 contracts 150.000 x 0.08 = 12,000

33. The call premium per Canadian dollar on April 19 is $0.04, the expiration date is September 19, and the strike price is $0.80. Bilal purchased three call options for the Canadian dollar 150,000, on April 19. He decides to let his options expire unexercised on September 19 because the spot rate for the Canadian dollar fell to $0.70 on that day. His total loss from this speculation will be-10.000 -9,000 -8,000 -7,000 -6,000 [loss = CAD 150000x 0.04=6000] 34. On June 10, the closing exchange rate of French francs was $0.15. Puts which would mature on September 19 with a strike price of $0.16 were traded at $0.05. The intrinsic value of the call on June 10 was $-----+0.31 +0.05 +0.01 [intrinsic value=0.16 0.15=0.01] -0.05 -0.01

35. The premium for a British call pound with a strike price of $1.75 is $0.07. The breakeven point is $----- for the buyer of the call.1.68 1.75 1.80 1.82 [breakeven pt=1.75+0.07=1.82] 1.90

36. A US co. wants to use a currency put option to hedge 10million French francs in accounts receivable. The premium of the currency put option with a strike price of $0.20 is 0.05. If the option is exercised, the total amount of dollars received after accounting for the premium payment is $-----1,500,000 total receipts=ff10m x 0.20= 2000000 total premium=ff10m x 0.05= -5000002,000,000 2,500,000 3,000,000 3,500,00037. The premium for a German put mark with an exercise price of $0.70 is $0.05. The breakeven point is $--- for the buyer of the put.0.70 0.65 [breakeven pt = 0.70 0.05 = 0.65] 0.55 0.50 0.45

38. In accounting exposure, if exposed assets are greater than exposed liabilities, foreign currency depreciations will produce exchange --------------

appreciation losses depreciation gains

39. Which of the following is not a desirable factor for a multinational firm to establish a subsidiary in a country?

price stability availability of funds high rate of taxes low exchange rate

40. A(n) ------------------- hedge protects the company from adverse exchange rate movements but allow the company to benefit from favorable movementsbalance sheet forward market money market options market swap agreement

41. Boing co. sold an airplane to PIA for 100million rupees with terms of one year. The spot rate for PAR is $0.15 per dollar and Boing expects to exchange 100 million rupees for $15million (100million x 0.15) when payment is received. If the spot rate for the rupee declines to $0.14 one year from today, what is the potential gain or loss.a. +$1million b. +$2million c. -$1million [$15m - $14m = $1m] d. -$2million e. -$3million 42. A US CO. has an account payable of UKP 10,000 for a British company. The current spot rate for the pound is $2.01 and the three month forward rate for the pound is $2.02. What will be the approximate value of the account payable in dollar if the company makes a forward hedge?$20,200 [$2.02x ukp10000 = $20200 ] $20,100 $20,000 $20,300 $20,500 43. A US CO. has an account payable of UKP 10,000 for a British company. The current spot rate for the pound is $2.01 and the three month forward rate for the pound is $2.02, the 3 month interest rate in the US is 2%, and 3month interest rate in Britain is 3%. What will be the approximate value of the account payable in dollar if the company makes a money-market hedge?$20,219 $19,999 $ 19,905 [ borrow ukp 9709 (10000/1.03) buy $19515 ( ukp9709 x 2.01) invest $19515 in US at 2% receive $19905 ($19515x1.02) ]d. $19,515 e. $18,80044. An American firm has just bought merchandise from a British firm for UKP 50,000 on terms of net 90 days. The US company has purchased a 3-month call option on 50,000 pound at a strike price of $1.7 per pound and a premium cost of $0.02 per pound. On the day the option matures, the spot exchange rate is $1.8 per pound. What will be the approximate value of the pound payable in US dollars if the US company exercises the option at that time?$91,000 $90,000 $86,000 $85,000 [call option= ukp50000x$1.7=$85000) $81,000

45. An American firm has just bought merchandise from a British firm for UKP 50,000 on terms of net 90 days. The US company has purchased a 3-month call option on 50,000 pound at a strike price of $1.7 per pound and a premium cost of $0.02 per pound. On the day the option matures, the spot exchange rate is $1.8 per pound. Should the US company exercise the option at that time or buy British pound in the spot market?

exercise the option call option=ukp50000x$1.7=$85000 spot transaction ukp50000x$1.8=$90000 thus the US co. should exercise the option b. buy British pound spotc. does not make any differenced. cannot tell