Exam 7: Futures and Options on Foreign Exchange

What paradigm is used to define the futures price?

Find the input d₁ of the Black-Scholes price of a six-month call option on Japanese yen.The strike price is $1 = ¥100.The volatility is 25 percent per annum; r_$ = 5.5% and r_¥ = 6%.

Using your results from parts a)and b)find the value of this put option (in €). Your answer is worth zero points if it does not include currency symbols (€)!

Today's settlement price on a Chicago Mercantile Exchange (CME)Yen futures contract is $0.8011/¥100.Your margin account currently has a balance of $2,000.The next three days' settlement prices are $0.8057/¥100,$0.7996/¥100,and $0.7985/¥100.(The contractual size of one CME Yen contract is ¥12,500,000).If you have a long position in one futures contract,the changes in the margin account from daily marking-to-market,will result in the balance of the margin account after the third day to be

An "option" is

Comparing "forward" and "futures" exchange contracts,we can say that

A put option on $15,000 with a strike price of €10,000 is the same thing as a call option on €10,000 with a strike price of $15,000.

Find the value of a call option written on €100 with a strike price of $1.00 = €1.00.In one period there are two possibilities: the exchange rate will move up by 15% or down by 15% .The U.S.risk-free rate is 5% over the period.The risk-neutral probability of dollar depreciation is ²/₃ and the risk-neutral probability of the dollar strengthening is ¹/₃.

State the composition of the replicating portfolio; your answer should contain "trading orders" of what to buy and what to sell at time zero.

If the call finishes out-of-the-money what is your portfolio cash flow?

The Black-Scholes option pricing formulae

The hedge ratio

Find the input d₁ of the Black-Scholes price of a six-month call option written on €100,000 with a strike price of $1.00 = €1.00.The current exchange rate is $1.25 = €1.00; The U.S.risk-free rate is 5% over the period and the euro-zone risk-free rate is 4%.The volatility of the underlying asset is 10.7 percent.

USING RISK NEUTRAL VALUATION (i.e.the binomial option pricing model)find the value of the call (in euro).

In the CURRENCY TRADING section of The Wall Street Journal,the following appeared under the heading OPTIONS: Which combination of the following statements are true? (i)- The time values of the 68 May and 69 May put options are respectively .30 cents and .50 cents. (ii)- The 68 May put option has a lower time value (price)than the 69 May put option. (iii)- If everything else is kept constant,the spot price and the put premium are inversely related. (iv)- The time values of the 68 May and 69 May put options are,respectively,1.63 cents and 0.83 cents. (v)- If everything else is kept constant,the strike price and the put premium are inversely related.

Find the value of a one-year put option on $15,000 with a strike price of €10,000.In one year the exchange rate (currently S₀($/€)= $1.50/€)can increase by 60% or decrease by 37.5% .The current one-year interest rate in the U.S.is i_$ = 4% and the current one-year interest rate in the euro zone is i_€ = 4%.

Which of the lines is a graph of the profit at maturity of writing a call option on €62,500 with a strike price of $1.20 = €1.00 and an option premium of $3,125?

Yesterday,you entered into a futures contract to sell €62,500 at $1.50 per €.Your initial performance bond is $1,500 and your maintenance level is $500.At what settle price will you get a demand for additional funds to be posted?

Value a 1-year call option written on £10,000 with an exercise price of $2.00 = £1.00.The spot exchange rate is $2.00 = £1.00; The U.S.risk-free rate is 5% and the U.K.risk-free rate is also 5%.In the next year,the pound will either double in dollar terms or fall by half (i.e.u = 2 and d = ½).Hint: H = ⅔.

The volume of OTC currency options trading is