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ECO – Multiple Choice Questions

ECO – Multiple Choice Questions
 

1) American Standard Co. has a 90 day £1 million receivable. American Standard’s bank, Bank of America, suggests a 90 day forward contract. American Standard sells forward £1 million. American Standard is:
a) Hedging.
b) Speculating.
c) Locking in an arbitrage profit.

2) American Standard Co. has a 90 day £62,500 receivable. American Standard’s bank, Bank of America, suggests a put option contract that matures in 90 days. American Standard purchases one put option contract, where one contract corresponds to a quantity of £62,500. American Standard is:
a) Hedging.
b) Speculating.
c) Locking in an arbitrage profit.

3) American Standard Co. has a 90 day £62,500 receivable. American Standard’s bank, Bank of America, suggests a call option contract that matures in 90 days. American Standard purchases one call option contract, where one contract corresponds to a quantity of £62,500. American Standard is:
a) Hedging.
b) Speculating.
c) Locking in an arbitrage profit.

4) Today’s spot price for gold is $1000. The 90 day forward price is also $1000. Goldbug Co. sells gold from inventory and buys forward an equivalent quantity of gold. Goldbug Co. invests the funds from the sale of the gold in a government insured bank certificate of deposit for 90 days. The bank pays 4% interest on the certificate of deposit. Goldbug Co. is:
a) Hedging.
b) Speculating.
c) Locking in an arbitrage profit.

5) An American purchases £1 million today and deposits the funds in a London bank for one year at an annual rate of 4%. She simultaneously sells forward (1 year contract) £1.04 million. She earns more than she would have earned, if she had deposited her funds in a bank in the United States. She is:
a) Hedging.
b) Speculating.
c) Locking in an arbitrage profit.

6) A German sells €1 million and deposits dollars in a United States bank for one month. She believes that the euro will depreciate and will use the dollars from her United States bank account to purchase euro in the spot market in one month. She is:
a) Hedging.
b) Speculating.
c) Locking in an arbitrage profit.

 

7) A German sells forward €1 million at $1.50/€. The spot rate for the euro when the forward contract matures is $1.60/€. What is her profit/loss?
a) A profit of €62,500.
b) A profit of €100,000.
c) A loss of €62,500.
d) A loss of €100,000.

8) An American has $1 million and uses it to buy euro forward at the forward rate of $1.60/€. The spot rate for the euro when the forward contract matures is $1.50/€. What is her profit/loss?
a) A profit of $62,500.
b) A profit of $100,000.
c) A loss of $62,500.
d) A loss of $100,000.

Use the following information for questions 9 and 10 below. You may assume (for simplicity) that both put and call option contracts for gold are for a quantity of one ounce of gold. Both the put and call options have the same maturity. The premium for the call is $2/ounce and the premium for the put is $1/ounce. Both options have a strike price of $1100/ounce.

9) An investor writes (or sells) one put option contract. If the price of gold in the spot market at the maturity date of the option is $1095, what is her profit/loss?
a) A profit of $5.
b) A profit of $6.
c) A loss of $5.
d) A loss of $4.

10) An investor buys one call option contract. If the price of gold in the spot market at the maturity date of the option is $1104, what is her profit/loss?
a) A profit of $4.
b) A profit of $2.
c) A loss of $4.
d) A loss of $6.

 

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