Which of the following are rules to use when choosing between forward contracts and currency options:

Related MCQs

• Assume that Patton Co. will receive 100,000 New Zealand dollars (NZ$) in 180 days. Today's spot rate of the NZ$ is £0.35, and the 180-day forward rate is £0.36. A call option on NZ$ exists, with an exercise price of £0.37, a premium of £0.01, and a 180- day expiration date. A put option on NZ$ exists with an exercise price of £0.36, a premium of £0.01, and a 180-day expiration date. Patton Co. has developed the following probability distribution for the spot rate in 180 days: Possible Spot Rate in 90 Days Probability £0.30 10% £0.35 60% £0.40 30% The probability that the forward hedge will result in more U.S. dollars received than the options hedge is _______ (deduct the amount paid for the premium when estimating the U.S. dollars received on the options hedge).
• Assume that Patton Co. will receive 100,000 New Zealand dollars (NZ$) in 180 days. Today's spot rate of the NZ$ is £0.35, and the 180-day forward rate is £0.36. A call option on NZ$ exists, with an exercise price of £0.37, a premium of £0.01, and a 180-day expiration date. A put option on NZ$ exists with an exercise price of £0.36, a premium of £0.01, and a 180-day expiration date. Patton Co. has developed the following probability distribution for the spot rate in 180 days: Possible Spot Rate in 90 Days Probability £0.30 10% £0.35 60% £0.40 30% The probability that the forward hedge will result in more U.S. dollars received than the options hedge is _______ (deduct the amount paid for the premium when estimating the U.S. dollars received on the options hedge).
• European currency options can be exercised _______; American currency options can be exercised _______.
• The currency of country X is pegged to the currency of country Y. Assume that county Y's currency depreciates against the currency of country Z. It is likely that country X will export _______ to country Z and import _______ from country Z.
• The currency of country X is pegged to the currency of country Y. Assume that county Y's currency depreciates against the currency of country Z. It is likely that country X will export _______ to country Z and import _______ from country Z.
• Futures contracts are typically _______; forward contracts are typically _______.
• Assume a UK firm uses a forward contract to hedge all of its translation exposure. Also assume that the firm underestimated what its foreign earnings would be. Assume that the foreign currency depreciated over the year. The firm would generate a translation _______, which would be _______ than the gain generated by the forward contract.
• When the value of one currency falls relative to another currency, the exchange rate for the first currency has
• Due to _______, market forces should realign the relationship between the interest rate differential of two currencies and the forward premium (or discount) on the forward exchange rate between the two currencies.
• With regard to hedging translation exposure, translation losses _______; and gains on forward contracts used to hedge translation exposure _______.