Taxation of Foreign Exchange Profits
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Taxation of Foreign Exchange Profits

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Questions and Answers

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

    <p>positive</p> 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?

    <p>$5,900 loss</p> Signup and view all the answers

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

    <p>Foreign exchange futures market</p> Signup and view all the answers

    What is the purpose of margins in futures contracts?

    <p>To protect investors against default</p> Signup and view all the answers

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

    <p>All of the above</p> Signup and view all the answers

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

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

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

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

    What is the purpose of a futures contract?

    <p>To hedge against price fluctuations</p> 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?

    <p>If the stock price is above $52.50 in March</p> 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?

    <p>If the stock price is below $56.00 in June</p> 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?

    <p>Buy the asset and short a futures contract</p> Signup and view all the answers

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

    <p>An arbitrageur can take a long futures position but cannot force immediate delivery of the asset</p> 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?

    <p>Enter into a long futures contract and wait for delivery to be made</p> 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?

    <p>1475 - 5.1</p> Signup and view all the answers

    What is the open interest of a futures contract?

    <p>The total number of long positions outstanding</p> 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?

    <p>Entering into a long forward contract to buy 1 million Canadian dollars</p> 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?

    <p>The trader gains $60,000</p> 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?

    <p>To diversify their investment portfolio</p> Signup and view all the answers

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

    <p>The net gain to all parties involved is zero</p> Signup and view all the answers

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