1 – If the US dollar appreciates against the euro and the British pound but depreciates against the Japanese yen and the Canadian dollar, do the following exchange rates rise or fall? (a) euro/US dollar; (b) US dollar/pound; (c) yen/US dollar; (d) US dollar/Canadian dollar.

2 – Suppose that the price in the United States of German BMWs rise from $31,000 to $33,000, the price of the Japanese Nikon cameras falls from $110 to $ 105, the price of English shoes falls from $205 to $180, and the price of French truffles rises from $35 to $40 per box.  Which currencies have appreciated against the dollar and which have depreciated?

3– If inflation is 3% in both the UK and the US, what does the purchasing power parity theory imply about whether the dollar will appreciate or depreciate against the pound?  What assumption is vital to this theory?

4 – If a cow costs 500 dollars in the US, 150,000 yen in Japan, and 550 Euros in France, and if the law of one price holds, what are the euro/dollar and yen/dollar exchange rates? 

5 – If the dollar/pound exchange rate rises and the yen/dollar exchange rate falls, which of the two foreign currencies (if either) appreciates relative to the dollar?  Which (if either) depreciates?

6 – If a compact disc (CD) costs 16 dollars in the US, 6 pounds in the UK, and 3500 yen in Japan – and the exchange rates are 2 dollars/1 pound and 200 yen/1 dollar – what are the real exchange rates in terms of CDs?

7 – What is the difference between a spot transaction and a forward transaction?  What advantages does a futures contract have over a forward transaction?

8 – What is an options contract?  What are the rights obligations between the buyer and seller?  How does a call option differ from a put option?

9 – What is the difference between using options to hedge and using options to speculate?

10 – Consider options on Bigmove Corporation stock.  Suppose that there are call options with a strike price of $75 and put options with a strike price of $65.  Which, if any, of the options are in the money if the current price of Bigmove’s stock is (a) $60, (b) $70, and (c) $80?

11 – In early 2000, the Dow Jones Industrial Average rose above the 11,000 level.  If the Dow were to fall to 7000, who would gain the most: investors who had bought call options, investors who had sold call options, investors who had bought put options, or investors who had sold put options?  Who would be hurt the most?

12 – Suppose that a court decision will have a major impact on a firm’s profits.  If the court decision is favorable, you estimate that the firm’s stock will be worth $100 per share.  If the court ruling is unfavorable, you estimate that the stock will be worth only $60 per share.  Currently, the price is $80 per share, as half the market participants are betting on each possibility.  Is there any way to use options contracts to profit from this situation?