Question

In: Finance

11-) Don works for the currency trading unit of a large bank in London. He speculates...

11-)

Don works for the currency trading unit of a large bank in London. He speculates that in the coming months the dollar will rise sharply vs. the pound. What should Don do to act on his speculation?

Select one:

a. Sell a put on the pound.

b. Buy a put on the pound.

c. Buy a call on the pound.

d. Sell a call on the pound.

12-)

Interest spreads in the eurocurrency market are small for many reasons EXCEPT:

Select one:

a. Eurocurrency loans are secured loans.

b. Borrowers are usually large corporations or government entities.

c. The eurocurrency is a wholesale market.

d. Eurocurrency deposits and loans are made in amounts of $500,000 or more on an unsecured basis.

15-)

If the direct quote for a U.S. investor for British pounds is $1.43/£, then the indirect quote for the U.S. investor would be ________ and the direct quote for the British investor would be ________.

Select one:

a. $0.699/£; £0.699/$

b. £0.699/$; £0.699/$

c. £0.699/$; $1.43/£

d. £1.43/£; £0.699/$

Solutions

Expert Solution

Answer 11-) Correct answer is option b.
Given that, as per speculation, dollar will rise sharply vs. the pound. So, pound will fall. If we buy a put on pound, the value of put option will increase.

Note: Selling a call on the pound in option d is also correct, but most appropriate is option b, that is, to "buy a put on the pound". This is because, in case of option d, profit will be limited.

Answer 12-)The correct option is a.
Eurocurrency loans are secured loans is not a reason why interest spreads in the eurocurrency market are small.
Lending rate is low because eurocurrency is a wholesale market and large corporations or government entities get credit at low rate due to their credit rating and also due to large transactions. Option d is also reason as to why interest spreads in the eurocurrency market are small.


Answer 15: Option b is correct that is £0.699/$; £0.699/$
In case of direct quotation, 1 unit of a foreign currency is written in terms of domestic currency. On the other hand, in case of indirect quotation, 1 unit of a domestic currency is written in terms of foreign currency.
In the given question, the direct and indirect quotes are calculated as:

Indirect quote for the U.S. investor is £1/1.43$=£0.699$
Direct quote for the British investor is £1/1.43$=£0.699$

jeff jeffy answered 1 year ago
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