1.The value of a call option will fall if:

(a)the price of the underlying asset rises.

(b)the exercise price is increased after the option is listed.

(c)the standard deviation of the underlying asset's returns falls.

(d)the expiration date of the option is lengthened.

2.The value of a put option will fall if:

(a)the price of the underlying asset falls.

(b)the exercise price is reduced after the option is listed.

(c)the standard deviation of the underlying asset's returns falls.

(d)the expiration date of the option is lengthened.

3.On November 19, 1992, the spot price of Swiss francs was $0.6892/SF.  December call options on Swiss francs with a 68 strike price were selling for 2.22 on the Philadelphia Exchange.  These call options were:

(a)in-the-money options.

(b)out-of-the-money options.

(c)at-the-money options.

(d)even-money options.

4.A European call option is:

(a)the same as an American call option.

(b)an option which can be exercised at any time.

(c)an option which can be exercised only on its expiration date.

(d)an option traded in Europe.

5.A corporate treasurer who expected a foreign-currency cash inflow but was uncertain about its timing and size would probably want to hedge with:

(a)futures contracts.

(b)FRAs.

(c)forward contracts.

(d)option contracts.

6.In efficient financial markets the cost of hedging with forwards is:

(a)more than the cost of hedging with futures.

(b)more than the cost of hedging with currency swaps.

(c)more than the cost of hedging with options.

(d)less than the cost of hedging with options.

7.Which of the following options with identical strike prices is likely to have the highest option premium?

(a)An out-of-the-money one-month option.

(b)An out-of-the-money two-month option.

(c)An in-the-money one-month option.

(d)An in-the-money two-month option.

8.XYZ Corporation owes a Japanese exporter ¥4,000,000 in June.  XYZ can hedge this payment by:

(a)buying yen call options.

(b)buying yen put options.

(c)selling yen futures contracts.

(d)swapping ten-year dollar debt for yen debt.

9.Which of the following produces almost unlimited exposure?

(a)Buying a call option.

(b)Buying a put option.

(c)Writing a call option.

(d)Writing a call option at a strike price of 65 and buying a call option on the same asset with a strike price of 70.

10.The treasurer of BookEnds wants to cap the company's three-month, March LIBOR borrowing rate at 4 percent, but also wants to be able to take advantage of any sharp interest rate declines.  What should the treasurer do?

(a)Buy a March Eurodollar put option with a 9600 strike price.

(b)Buy a March Eurodollar put option with a 9400 strike price.

(c)Buy a March Eurodollar call option with a 9600 strike price.

(d)Buy a March Eurodollar call option with a 9400 strike price.

11.The treasurer of SamsStore want to select the least expensive way from the following alternatives for locking in a 5 percent, three-month LIBOR borrowing rate in June.  The treasurer should:

(a)buy a June Eurodollar put option.

(b)buy a June Eurodollar call option.

(c)sell June Eurodollar futures contracts.

(d)buy June Eurodollar futures contracts.

12.The treasurer of WhatNot wants to reduce the cost of using Eurodollar put options to hedge against an unexpected increase in LIBOR in June, 1993.  The treasurer should:

(a)buy June Eurodollar put options and write June Eurodollar call options.

(b)buy June Eurodollar call options and write June Eurodollar put options.

(c)buy both put and call options on June Eurodollars.

(d)write both put and call options on June Eurodollars.

13.The treasurer of Foundex is deciding how to set a cap on future borrowing costs.  The treasurer knows that the interest rate cap will be equal to:

(a)the interest rate implicit in the strike price of the interest-rate option plus the option premium.

(b)the interest rate implicit in the strike price of the interest-rate option less the option premium.

(c)the option premium.

(d)the interest rate implicit in the option strike price.

14.A major disadvantage of options written on currency futures contracts instead of spot currency is that:

(a)options on futures are marked to market.

(b)options on futures require maintenance margins

(c)options on futures expose the hedger to basis risk.

(d)options on futures are standardized.

15.An interest rate swap usually involves:

(a)the exchange of interest and principal payments.

(b)only the exchange of principal payments.

(c)only the exchange of interest rate payments.

(d)the exchange of cash dividend payments.

16.A poor reason for the existence of currency swaps is that:

(a)currency risk can be separated from borrower credit risk.

(b)creditors are fooled into loaning funds at lower interest rates on currency swaps.

(c)borrowers are able to raise funds more cheaply in a currency they do not need.

(d)currency swaps may be a way to avoid regulatory costs associated with raising funds in foreign capital markets.

17.Most interest rate swaps these days:

(a)are made directly between the two counterparties.

(b)are made through swap dealers.

(c)are illegal.

(d)do not require the counterparties to pay interest and principal on the debt they have issued if one of the counterparties defaults on its swap payments.

18.An interest rate swap is unlikely to provide benefits to both counterparties if:

(a)one of the counterparties is unable to borrow at a lower cost than the other in at least one money or capital market.

(b)both parties want floating-rate money based on the same index.

(c)both parties face identical borrowing costs in all markets.

(d)a financial intermediary is needed to arrange the swap.

19.In a currency swap:

(a)the swap dealer faces no credit risk associated with receiving the promised foreign-currency payments from the counterparties.

(b)the swap dealer passes on the credit risk of foreign-currency payments to the counterparties.

(c)counterparty credit risk has been assumed by the swap dealer.

(d)the swap dealer stands to lose the entire amount of a counterparty's principal payments if the counterparty defaults on the payments. 

20.A cylinder:

(a)is a risk management strategy which sets a cap and a floor on interest rate payments.

(b)is a risk management strategy which sets only a cap on interest rate payments.

(c)is a risk management strategy which sets only a floor on interest rate payments.

(d)is a risk management strategy which leaves the firm in an open position.

21.The sale of a strip of Eurodollar futures contracts can be used to:

(a)lock in a fixed interest rate for lending funds.

(b)create a synthetic fixed-interest-rate loan.

(c)reduce the cost of setting an interest-rate cap.

(d)reduce the cost of setting an interest-rate floor.

22.Guidelines for the financial reporting of foreign-currency hedges are contained in:

(a)FASB no. 80.

(b)FASB no. 52.

(c)FASB no. 105.

(d)EITF no. 90-17.

23.Guidelines for the financial reporting of non-currency hedges are contained in:

(a)FASB no. 80.

(b)FASB no. 52.

(c)FASB no 105.

(d)EITF no. 90-17.

24.Guidelines for the financial reporting of financial instruments with off-balance-sheet risk are contained in:

(a)FASB no. 80.

(b)FASB no. 52.

(c)FASB no. 105.

(d)EITF no. 90-17. 

25.Guidelines for the financial reporting of foreign-currency option hedges are contained in:

(a)FASB no. 80.

(b)FASB no. 52.

(c)FASB no. 105.

(d)EITF no. 90-17.