Professional Documents
Culture Documents
2.
3.
4.
The choice between a currency forward or futures contract depends on whether the
instrument is to be used for hedging or for speculation.
ANS: False. The choice depends on the tradeoffs between flexibility, liquidity, cost, and price.
5.
Exchange-traded currency futures contracts are customized to fit the needs of individual
clients.
ANS: False. Exchange-traded futures contracts are highly standardized instruments.
6.
Changes in the underlying spot rate of exchange are settled daily in a futures contract
whereas they are settled at maturity in a forward contract.
ANS: True.
7.
A major problem with a currency forward contract is that one party always has an incentive
to default when the actual spot rate diverges from the contract price.
ANS: True.
8.
If the closing spot rate is $0.5800/C$ at the expiration of a forward contract, the party that
has sold C$ at a forward rate of $0.5754/C$ has an incentive to default.
ANS: True.
9.
If the closing spot rate is $0.5800/C$ at the expiration of a forward contract, a party that has
sold dollars at a forward rate of $0.5754/C$ has an incentive to default.
ANS: False. This price is profitable for the short dollar (long C$) forward position.
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2.
3.
A futures hedge in which there is a match with the underlying position on both currency and
maturity is called a ____.
a. cross-hedge
b. delta-cross-hedge
c. delta-hedge
d. perfect hedge
e. none of the above
ANS: D
4.
The exposure of a futures hedge in which there is a match with the underlying position on
currency but not on maturity is called a ____.
a. cross-hedge
b. delta-cross-hedge
c. delta-hedge
d. perfect hedge
e. none of the above
ANS: C
5.
The exposure of a futures hedge in which there is a match with the underlying position on
maturity but not on currency is called a ____.
a. cross-hedge
b. delta-cross-hedge
c. delta-hedge
d. perfect hedge
e. none of the above
ANS: A
6.
The exposure of a futures hedge in which there is a currency and a maturity mismatch with
the underlying position is called a ____.
a. cross-hedge
b. delta-cross-hedge
c. delta-hedge
d. perfect hedge
e. none of the above
ANS: B
8.
9.
The risk of unexpected change in the relationship between currency futures prices and
currency spot prices is called ____.
a. basis risk
b. currency risk
c. exchange rate risk
d. interest rate risk
e. none of the above
ANS: A
10. The ____ provides the optimal amount in a futures hedge per unit of value exposed to
currency risk.
a. basis
b. hedge ratio
c. margin requirement
d. omega factor
e. none of the above
ANS: B
Problems
1.
You work for Hong Kong Telecom and are considering ways to hedge a 10 million cash
inflow to be received in three months. The current spot rate is equal to the three-month
forward exchange rate at S0/HK$ = F3/HK$ = 0.1000/HK$. The current spot rate for the U.S.
dollar is S0$/HK$ = $0.1250/HK$.
a. The Hong Kong Exchange (HKEx) trades HK$/ contracts that expire in five months
with a contract size of 50,000. You estimate = 1.02 based on the regression stHK$/ =
+futtHK$/+e. The r2 of this regression is 0.97. How many pound contracts should you
sell to minimize the risk of your hedged position?
b. A bank is willing to engineer a HK$-per-$ futures contract with a 3-month maturity. You
estimate = 1.10 based on the regression stHK$/ = +stHK$/$+e. The r2 of this regression
is 0.42. What should be the dollar size of your futures position to minimize the risk of
your hedged position?
c. The Chicago Mercantile Exchange trades HK$ futures contracts that expire in five
months and have a contract size of HK$500,000. You estimate = 1.06 based on the
regression stHK$/ = +futtHK$/$+e. The r2 of this regression is 0.36. How many CME
HK$ contracts should you sell to minimize the risk of your hedged position?
d. Which of these contracts provides the highest quality hedge?
Problem Solutions
1.
2.
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