1. The forward market

A. involves contracting today for the future purchase of sale of foreign exchange at the spot rate that will prevail at the maturity of the contract.

B. involves contracting today for the future purchase of sale of foreign exchange at a price agreed upon today.

C. involves contracting today for the right but not obligation to the future purchase of sale of foreign exchange at a price agreed upon today.

D. none of the above

2. The direct spot quote for the British pound is $1.5/£ and the one-year forward rate is $1.48/£. The difference between the two rates is likely to mean that ________.

A. inflation in the U.S. during the past year was lower than in the UK

B. real interest rates are rising faster in the UK than in the U.S.

C. prices in The UK are expected to rise more rapidly than in the U.S.

D. the British pound's spot rate is expected to rise in terms of the U.S. dollar

3. The Efficient Markets Hypothesis states that if markets are efficient, then

A. markets tend to evolve to low transactions costs and speedy execution of orders.

B. current asset prices (e.g. exchange rates) fully reflect all the available and relevant information.

C. current exchange rates cannot be explained by such fundamental forces as money supplies, inflation rates and so forth.

D. none of the above

4. From the perspective of the writer of a put option written on €10,000. If the strike price is $1.55/€, and the option premium is $300, at what exchange rate will you break even?

A. $1.52/€

B. $1.55/€

C. $1.58/€

D. None of the above

5. If the implied volatility of a call option is lower than your estimated fair value of the option’s volatility,

A. The call option is overpriced.

B. The call option is underpriced.

C. The call option is correctly priced.

D. None of the above, since volatility is constant.

6. For European options on the euro, what is the effect of an increase in the spot price St?

A. Decrease the value of calls and puts ceteris paribus

B. Increase the value of calls and puts ceteris paribus

C. Decrease the value of calls, increase the value of puts ceteris paribus

D. Increase the value of calls, decrease the value of puts ceteris paribus