Taxation of Foreign Exchange Profits

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Which one of the following best describes a long forward position?

Having exposure to the price of an asset and taking a position in a derivative to offset the exposure

Agreeing to sell the underlying asset at a certain price in the future

Betting on the future movements in the price of an asset

Agreeing to buy the underlying asset at a certain price in the future (correct)

Which one of the following best describes arbitrage?

Giving someone else the right to buy an asset from you

Taking a position in two or more different markets to lock in a profit (correct)

Betting on the future movements in the price of an asset

Taking a position in a derivative to offset exposure to the price of an asset

What is the difference between selling a call option and buying a put option?

Buying a put option involves buying an option from someone else

Both involve giving someone else the right to buy an asset from you

Both involve buying an option from someone else

Selling a call option involves giving someone else the right to buy an asset from you (correct)

According to the text, when you buy a put option, the payoff is

positive Signup and view all the answers

In problem 1.6, if the cotton price at the end of the contract is 48.20 cents per pound, how much does the trader gain or lose?

$5,900 loss Signup and view all the answers

Which market quotes prices as the number of US dollars per unit of foreign currency?

Foreign exchange futures market Signup and view all the answers

What is the purpose of margins in futures contracts?

To protect investors against default Signup and view all the answers

What are the most important aspects of designing a new futures contract?

All of the above Signup and view all the answers

What does a stop order to sell at $2 mean?

An order to sell at a price of $2 or less Signup and view all the answers

Which of the following is true about an exchange-traded stock option?

It is a security sold by one investor to another Signup and view all the answers

What is the purpose of a futures contract?

To hedge against price fluctuations Signup and view all the answers

Under what circumstances will the holder of a March call option to buy a share for $50 make a profit?

If the stock price is above $52.50 in March Signup and view all the answers

Under what circumstances will the seller of a June put option to sell a share for $60 make a profit?

If the stock price is below $56.00 in June Signup and view all the answers

According to the text, if the futures price of a commodity is greater than the spot price during the delivery period, what can an arbitrageur do to make an immediate profit?

Buy the asset and short a futures contract Signup and view all the answers

What happens if the futures price is less than the spot price during the delivery period?

An arbitrageur can take a long futures position but cannot force immediate delivery of the asset Signup and view all the answers

What strategy may companies interested in acquiring the asset use if the futures price is less than the spot price during the delivery period?

Enter into a long futures contract and wait for delivery to be made Signup and view all the answers

What is the total payoff from the two contracts entered into on July 1, 2011 and September 1, 2011?

1475 - 5.1 Signup and view all the answers

What is the open interest of a futures contract?

The total number of long positions outstanding Signup and view all the answers

Which of the following is a way to hedge exchange rate risk for a US company that expects to pay 1 million Canadian dollars in six months?

Entering into a long forward contract to buy 1 million Canadian dollars Signup and view all the answers

If the exchange rate at the end of a short forward contract on 100 million yen is $0.0074 per yen, how much does the trader gain or lose?

The trader gains $60,000 Signup and view all the answers

Which of the following is NOT a likely reason for investors to use a futures contract on long-term Treasury bonds?

To diversify their investment portfolio Signup and view all the answers

What does it mean when someone says that options and futures are zero-sum games?

The net gain to all parties involved is zero Signup and view all the answers