Question

QUESTION 5

1. A put option on UK pounds has a strike price of $2.05/£ and a cost of $0.02. What is the break-even price for the option?

		A) $2.03/£
		B) $2.05/£.
		C) $2.07/£
		D) The answer depends upon if this is a long or a short call option

QUESTION 6

1. Andrea Cujoli is a currency speculator who enjoys “betting” on changes in the foreign currency exchange market. Currently the spot price for the Japanese yen is ¥129.87/$ and the 6-month forward rate is ¥128.53/$. Andrea thinks the yen will move to ¥128.00/$ in the next six months. Andrea should _______ to profit from changing currency values.

		a) do nothing
		b) buy dollar
		c) sell yen
		d) sell dollar

  

QUESTION 7

1. A _______ is the term used to describe a foreign currency agreement between two parties to exchange a given amount of one currency for another, and after a period of time, to give back the original amounts.

		a) matched flow
		b) currency swap
		c) back-to-back loan
		d) credit swap

  

QUESTION 8

1. An agreement to exchange interest payments based on a fixed payment for those based on a variable rate (or vice versa) is known as a/an:

		A) forward rate agreement.
		B) interest rate future.
		C) interest rate swap.
		D) all of the above

QUESTION 9

1. Which following statement is Incorrect?

		A). A forward exchange agreement between currencies states the rate of exchange at which a foreign currency will be bought forward or sold forward at a specific date in the future.
		B). The spot and forward exchange rates are constantly in the state of equilibrium described by interest rate parity.
		C). The degree to which the prices of imported and exported goods change as a result of exchange rate changes is termed pass-through.
		D). If the identical product or service can be sold in two different markets; and no restrictions exist on the sale; and transportation costs of moving the product between markets are equal, then the products price should be the same in both markets. This is called the law of one price.

Answer 1

5.Correct answer A) $2.03/£

Break even price is that price at which profits are equal to zero. Hence the payoff is zero.

Put option is the option to sell an asset at the strike price. The option will be sold when the market price is lesser than the strike price. Break even will be achieved when the payoff equals cost.

= Strike price - cost

=   $2.05 - $0.02

=  $2.03/£

6.

Correct answer C) Sell Yen is correct.
Andrea should buy yen at forward rate for ¥128.53/$ and sell yen at ¥128.00/$.

7.

Correct answer B) : currency swap involves the exchange of interest and sometimes principal in one currency for the same in another currency. The exchange occurs at a pre specified fixed date and during the term of the contract

8.

Correct answer C) : Interest rate swap, in this agreement the interest payment which are based on fixed rate can be exchanged with those based on variable rate and vice a versa. As these are traded over the counter and it has an agreement set up between two or more parties.

9.

Correct answer B)

All statements appears to be correct in general.

B is the only one where there is a leeway for error. Ideally they reflect state of equilibrium so there is no arbitrage opportunity presented in the market. However, sometime there is an arbitrage opportunity available, which markets spots and latches on and hence is eventually removed. Hence, there isn't always a state of equilibrium.