Question 1

The Black-Scholes option pricing formula

Accepted Answer

A) is used widely in practice,especially by international banks in trading OTC options. 
B) is not widely used outside of the academic world. 
C) works well enough,but is not used in the real world because no one has the time to flog their calculator for five minutes on the trading floor. 
D) none of the options 
A) is used widely in practice,especially by international banks in trading OTC options. 
B) is not widely used outside of the academic world. 
C) works well enough,but is not used in the real world because no one has the time to flog their calculator for five minutes on the trading floor. 
D) none of the options A

Question 2

The current spot exchange rate is $1.55 = €1.00 and the three-month forward rate is $1.60 = €1.00.Consider a three-month American call option on €62,500 with a strike price of $1.50 = €1.00.If you pay an option premium of $5,000 to buy this call,at what exchange rate will you break-even?

Accepted Answer

A) $1.58 = €1.00 
B) $1.62 = €1.00 
C) $1.50 = €1.00 
D) $1.68 = €1.00 
A) $1.58 = €1.00 
B) $1.62 = €1.00 
C) $1.50 = €1.00 
D) $1.68 = €1.00 A

Question 3

Which of the follow options strategies are consistent in their belief about the future behavior of the underlying asset price?

Accepted Answer

A) Selling calls and selling puts 
B) Buying calls and buying puts 
C) Buying calls and selling puts 
D) none of the options 
A) Selling calls and selling puts 
B) Buying calls and buying puts 
C) Buying calls and selling puts 
D) none of the options C

Question 4

In reference to the futures market,a "speculator"

Accepted Answer

A) attempts to profit from a change in the futures price. 
B) wants to avoid price variation by locking in a purchase price of the underlying asset through a long position in the futures contract or a sales price through a short position in the futures contract. 
C) stands ready to buy or sell contracts in unlimited quantity. 
D) wants to avoid price variation by locking in a purchase price of the underlying asset through a long position in the futures contract or a sales price through a short position in the futures contract,and also stands ready to buy or sell contracts in unlimited quantity. 
A) attempts to profit from a change in the futures price. 
B) wants to avoid price variation by locking in a purchase price of the underlying asset through a long position in the futures contract or a sales price through a short position in the futures contract. 
C) stands ready to buy or sell contracts in unlimited quantity. 
D) wants to avoid price variation by locking in a purchase price of the underlying asset through a long position in the futures contract or a sales price through a short position in the futures contract,and also stands ready to buy or sell contracts in unlimited quantity.

Question 5

In the event of a default on one side of a futures trade,

Accepted Answer

A) the clearing member stands in for the defaulting party. 
B) the clearing member will seek restitution for the defaulting party. 
C) if the default is on the short side,a randomly selected long contract will not get paid.That party will then have standing to initiate a civil suit against the defaulting short. 
D) the clearing member stands in for the defaulting party and will seek restitution for the defaulting party. 
A) the clearing member stands in for the defaulting party. 
B) the clearing member will seek restitution for the defaulting party. 
C) if the default is on the short side,a randomly selected long contract will not get paid.That party will then have standing to initiate a civil suit against the defaulting short. 
D) the clearing member stands in for the defaulting party and will seek restitution for the defaulting party.

Question 6

A CME contract on €125,000 with September delivery

Accepted Answer

A) is an example of a forward contract. 
B) is an example of a futures contract. 
C) is an example of a put option. 
D) is an example of a call option. 
A) is an example of a forward contract. 
B) is an example of a futures contract. 
C) is an example of a put option. 
D) is an example of a call option.

Question 7

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?

Accepted Answer

A) A 
B) B 
C) C 
D) D 
A) A 
B) B 
C) C 
D) D

Question 8

The current spot exchange rate is $1.55 = €1.00 and the three-month forward rate is $1.60 = €1.00.Consider a three-month American call option on €62,500 with a strike price of $1.50 = €1.00.Immediate exercise of this option will generate a profit of

Accepted Answer

A) $6,125. 
B) $6,125/(1 + $\ddot { l } _{\$}$ )3/12. 
C) negative profit,so exercise would not occur. 
D) $3,125. 
A) $6,125. 
B) $6,125/(1 + $\ddot { l } _{\$}$ )3/12. 
C) negative profit,so exercise would not occur. 
D) $3,125.

Question 9

The current spot exchange rate is $1.55 = €1.00 and the three-month forward rate is $1.60 = €1.00.Consider a three-month American call option on €62,500.For this option to be considered at-the-money,the strike price must be

Accepted Answer

A) $1.60 = €1.00. 
B) $1.55 = €1.00. 
C) $1.55 × $\left( 1 + i _{\$} \right) ^ { 3 / 12 }$ = €1.00 × $\left( 1 + i _ { € } \right) ^ { 3 / 12 }$ . 
D) none of the options 
A) $1.60 = €1.00. 
B) $1.55 = €1.00. 
C) $1.55 × $\left( 1 + i _{\$} \right) ^ { 3 / 12 }$ = €1.00 × $\left( 1 + i _ { € } \right) ^ { 3 / 12 }$ . 
D) none of the options

Question 10

The "open interest" shown in currency futures quotations is

Accepted Answer

A) the total number of people indicating interest in buying the contracts in the near future. 
B) the total number of people indicating interest in selling the contracts in the near future. 
C) the total number of people indicating interest in buying or selling the contracts in the near future. 
D) the total number of long or short contracts outstanding for the particular delivery month. 
A) the total number of people indicating interest in buying the contracts in the near future. 
B) the total number of people indicating interest in selling the contracts in the near future. 
C) the total number of people indicating interest in buying or selling the contracts in the near future. 
D) the total number of long or short contracts outstanding for the particular delivery month.

Question 11

Consider an option to buy €12,500 for £10,000.In the next period,the euro can strengthen against the pound by 25 percent (i.e.,each euro will buy 25 percent more pounds)or weaken by 20 percent.
Big hint: don't round,keep exchange rates out to at least 4 decimal places.
 
$
\begin{array}{lll}
&spot Rates&Risk-tree Rates\
S_{0}(\$ / €) & \$ 1.60=€ 1.00&i \$ 3.00 \% \
S_{0}\left(\$ /  £)\right. & \$ 2.00=£ 1.00&i €4.00 \%  \
S_{0}\left(€ /£)\right. & € 1.25=£ 1.00&i £4.00 \%
\end{array}
$ Find the value of the call.

Accepted Answer

@#LAT-DLM& = @#LAT-DLM& = £1,068.38 £1,068.38 = @#LAT-DLM& ×

Question 12

Assume that the dollar-euro spot rate is $1.28 and the six-month forward rate is $F_{T}=S_{t} e^{\left(r_{\$}-r_{€}\right)^{T}}$ = $1.28 $e ^{.01 \times .5}$ = $1.2864.The six-month U.S.dollar rate is 5 percent and the Eurodollar rate is 4 percent.The minimum price that a six-month American call option with a striking price of $1.25 should sell for in a rational market is

Accepted Answer

A) 0 cents. 
B) 3.47 cents. 
C) 3.55 cents. 
D) 3 cents. 
A) 0 cents. 
B) 3.47 cents. 
C) 3.55 cents. 
D) 3 cents.

Question 13

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.

Accepted Answer

A) d1 = 0.103915 
B) d1 = 2.9871 
C) d1 = 0.0283 
D) none of the options 
A) d1 = 0.103915 
B) d1 = 2.9871 
C) d1 = 0.0283 
D) none of the options

Question 14

Use the European option pricing formula to find the value 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%.

Accepted Answer

A) 0.005395 
B) 0.005982 
C) $0.006137/¥ 
D) none of the options 
A) 0.005395 
B) 0.005982 
C) $0.006137/¥ 
D) none of the options

Question 15

For European currency options written on euro with a strike price in dollars,what is the effect of an increase in r$?

Accepted Answer

A) Decrease the value of calls and puts ceteris paribus 
B) Increase the value of calls and puts ceteris paribus 
C) Decrease the value of calls,increase the value of puts ceteris paribus 
D) Increase the value of calls,decrease the value of puts ceteris paribus 
A) Decrease the value of calls and puts ceteris paribus 
B) Increase the value of calls and puts ceteris paribus 
C) Decrease the value of calls,increase the value of puts ceteris paribus 
D) Increase the value of calls,decrease the value of puts ceteris paribus

Question 16

Most exchange traded currency options

Accepted Answer

A) mature every month,with daily resettlement. 
B) have original maturities of 1,2,and 3 years. 
C) have original maturities of 3,6,9,and 12 months. 
D) mature every month,without daily resettlement. 
A) mature every month,with daily resettlement. 
B) have original maturities of 1,2,and 3 years. 
C) have original maturities of 3,6,9,and 12 months. 
D) mature every month,without daily resettlement.

Question 17

A binomial call option premium is calculated as

Accepted Answer

A) C0 = [qCuT + (1 - q)CdT] / (1 + r$) 
B) C0 = [qCdT + (1 - q)CuT] / (1 + r$) 
C) C0 = [qCuT + (1 - q)CdT] / (1 - r$) 
D) C0 = [qCdT + (1 - q)CuT] / (1 - r$) 
A) C0 = [qCuT + (1 - q)CdT] / (1 + r$) 
B) C0 = [qCdT + (1 - q)CuT] / (1 + r$) 
C) C0 = [qCuT + (1 - q)CdT] / (1 - r$) 
D) C0 = [qCdT + (1 - q)CuT] / (1 - r$)

Question 18

Consider an option to buy £10,000 for €12,500.In the next period,if the pound appreciates against the dollar by 37.5 percent then the euro will appreciate against the dollar by ten percent.On the other hand,the euro could depreciate against the pound by 20 percent.
Big hint: don't round,keep exchange rates out to at least 4 decimal places.
 
$
\begin{array}{lll}
&spot Rates&Risk-tree Rates\
S_{0}(\$ / €) & \$ 1.60=€ 1.00&i \$ 3.00 \% \
S_{0}\left(\$ /  £)\right. & \$ 2.00=£ 1.00&i €4.00 \%  \
S_{0}\left(€ /£)\right. & € 1.25=£ 1.00&i £4.00 \%
\end{array}
$ Calculate the current €/£ spot exchange rate.

Accepted Answer

The answer of Consider an option to buy £10,000 for...

Question 19

Consider an option to buy €12,500 for £10,000.In the next period,the euro can strengthen against the pound by 25 percent (i.e.,each euro will buy 25 percent more pounds)or weaken by 20 percent.
Big hint: don't round,keep exchange rates out to at least 4 decimal places.
 
$
\begin{array}{lll}
&spot Rates&Risk-tree Rates\
S_{0}(\$ / €) & \$ 1.60=€ 1.00&i \$ 3.00 \% \
S_{0}\left(\$ /  £)\right. & \$ 2.00=£ 1.00&i €4.00 \%  \
S_{0}\left(€ /£)\right. & € 1.25=£ 1.00&i £4.00 \%
\end{array}
$ Find the cost today of your hedge portfolio in pounds.

Accepted Answer

The answer of Consider an option to buy €12,500 for...

Question 20

Draw the tree for a call option on $20,000 with a strike price of £10,000.The current exchange rate is £1.00 = $2.00 and in one period the dollar value of the pound will either double or be cut in half.The current interest rates are i$ = 3% and are i£ = 2%.

Accepted Answer

A)    
B)    
C) both of the options 
D) none of the options 
A)    
B)    
C) both of the options 
D) none of the options

The Black-Scholes option pricing formula

The current spot exchange rate is $1.55 = €1.00 and the three-month forward rate is $1.60 = €1.00.Consider a three-month American call option on €62,500 with a strike price of $1.50 = €1.00.If you pay an option premium of $5,000 to buy this call,at what exchange rate will you break-even?

Which of the follow options strategies are consistent in their belief about the future behavior of the underlying asset price?

In reference to the futures market,a "speculator"

In the event of a default on one side of a futures trade,

A CME contract on €125,000 with September delivery

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?

The current spot exchange rate is $1.55 = €1.00 and the three-month forward rate is $1.60 = €1.00.Consider a three-month American call option on €62,500 with a strike price of $1.50 = €1.00.Immediate exercise of this option will generate a profit of

The current spot exchange rate is $1.55 = €1.00 and the three-month forward rate is $1.60 = €1.00.Consider a three-month American call option on €62,500.For this option to be considered at-the-money,the strike price must be

The "open interest" shown in currency futures quotations is

Use the European option pricing formula to find the value 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%.

For European currency options written on euro with a strike price in dollars,what is the effect of an increase in r_$?

Most exchange traded currency options

A binomial call option premium is calculated as

Draw the tree for a call option on $20,000 with a strike price of £10,000.The current exchange rate is £1.00 = $2.00 and in one period the dollar value of the pound will either double or be cut in half.The current interest rates are i_$ = 3% and are i_£ = 2%.

International Monetary System

Globalization and the Multinational Firm

Balance of Payments

Corporate Governance Around the World

The Market for Foreign Exchange

International Parity Relationships and Forecasting Foreign Exchange Rates

Management of Transaction Exposure

Management of Economic Exposure

Management of Translation Exposure

International Banking and Money Market

International Bond Market

International Equity Markets

Interest Rate and Currency Swaps

International Portfolio Investment

Foreign Direct Investment and Cross-Border Acquisitions

International Capital Structure and the Cost of Capital

International Capital Budgeting

Multinational Cash Management

International Trade Finance

International Tax Environment and Transfer Pricing

Filters

Exam 7: Futures and Options on Foreign Exchange

The Black-Scholes option pricing formula

The current spot exchange rate is $1.55 = €1.00 and the three-month forward rate is $1.60 = €1.00.Consider a three-month American call option on €62,500 with a strike price of $1.50 = €1.00.If you pay an option premium of $5,000 to buy this call,at what exchange rate will you break-even?

Which of the follow options strategies are consistent in their belief about the future behavior of the underlying asset price?

In reference to the futures market,a "speculator"

In the event of a default on one side of a futures trade,

A CME contract on €125,000 with September delivery

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?

The current spot exchange rate is $1.55 = €1.00 and the three-month forward rate is $1.60 = €1.00.Consider a three-month American call option on €62,500 with a strike price of $1.50 = €1.00.Immediate exercise of this option will generate a profit of

The current spot exchange rate is $1.55 = €1.00 and the three-month forward rate is $1.60 = €1.00.Consider a three-month American call option on €62,500.For this option to be considered at-the-money,the strike price must be

The "open interest" shown in currency futures quotations is

Use the European option pricing formula to find the value 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%.

For European currency options written on euro with a strike price in dollars,what is the effect of an increase in r$?

Most exchange traded currency options

A binomial call option premium is calculated as

Draw the tree for a call option on $20,000 with a strike price of £10,000.The current exchange rate is £1.00 = $2.00 and in one period the dollar value of the pound will either double or be cut in half.The current interest rates are i$ = 3% and are i£ = 2%.

International Monetary System

Globalization and the Multinational Firm

Balance of Payments

Corporate Governance Around the World

The Market for Foreign Exchange

International Parity Relationships and Forecasting Foreign Exchange Rates

Management of Transaction Exposure

Management of Economic Exposure

Management of Translation Exposure

International Banking and Money Market

International Bond Market

International Equity Markets

Interest Rate and Currency Swaps

International Portfolio Investment

Foreign Direct Investment and Cross-Border Acquisitions

International Capital Structure and the Cost of Capital

International Capital Budgeting

Multinational Cash Management

International Trade Finance

International Tax Environment and Transfer Pricing

Filters

Use the European option pricing formula to find the value 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%.

For European currency options written on euro with a strike price in dollars,what is the effect of an increase in r_$?

Draw the tree for a call option on $20,000 with a strike price of £10,000.The current exchange rate is £1.00 = $2.00 and in one period the dollar value of the pound will either double or be cut in half.The current interest rates are i_$ = 3% and are i_£ = 2%.