Question

1)

The currency futures markets have a long history and are ______________ due to their information driven nature.

Select one:

a. heavily regulated by the U.S. federal government

b. extremely volatile

c. extremely complicated

d. not volatile

2)

Which one of the following is NOT a disadvantage when using currency futures?

Select one:

a. low initial payment to purchase the contract

b. limited number of currencies available in futures

c. fixed contract sizes by currency

d. limited number of expiration dates during the year

3)

Currency options are most often used when __.

Select one:

a. there is a future exchange rate risk for a definite event such as an accounts receivable.

b. there is a future exchange rate risk for a definite event such as an notes payable.

c. there is a future exchange rate risk for a definite event such as an accounts payable.

d. there is a future exchange rate risk event that is uncertain to occur.

Answer 1

1. Answer is b

As currency futures are in standardized form and are traded on the stock exchange. As they are traded on the stock exchange, information about the contract is readily available to investors. Thus, due to information driven nature currency futures are highly volatile as it includes higher risk and higher return.

2. Answer is a.

Low initial payment to purchase the future contract is an advantage when using currency futures and margin payment are required from time to time when contract value changes.

3. Answer is d.

Currency options are more often used to hedge the currency exchange rate risk. As future exchange rate risk is uncertain, therefore to protect it against the risk currency option is undertaken. Options are right but not an obligation to exercise a contract and provide hedge against the exchange rate risk.