Exam 7: Futures and Options on Foreign Exchange

What paradigm is used to define the futures price?

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. spotRates Risk-treeRates (\ /) \ 1.60=1.00 i\ 3.00\% \ /£) \ 2.00=£1.00 i4.00\% /£) 1.25=£1.00 i£4.00\% Calculate the current €/£ spot exchange rate.

In which market does a clearinghouse serve as a third party to all transactions?

An "option" is

American call and put premiums

Use the binomial option pricing model to find the value of a call option on £10,000 with a strike price of €12,500.The current exchange rate is €1.50/£1.00 and in the next period the exchange rate can increase to €2.40/£ or decrease to €0.9375/€1.00 .The current interest rates are i_€ = 3% and are i_£ = 4%.Choose the answer closest to yours.

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. spotRates Risk-treeRates (\ /) \ 1.60=1.00 i\ 3.00\% \ /£) \ 2.00=£1.00 i4.00\% /£) 1.25=£1.00 i£4.00\% Calculate the hedge ratio.

For European options,what is the effect of an increase in S_t?

For European options,what is the effect of an increase in the strike price E?

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. spotRates Risk-treeRates (\ /) \ 1.60=1.00 i\ 3.00\% \ /£) \ 2.00=£1.00 i4.00\% /£) 1.25=£1.00 i£4.00\% USING RISK NEUTRAL VALUATION (i.e.,the binomial option pricing model)find the value of the call (in euro).

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 short 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

Find the hedge ratio for a call option on £10,000 with a strike price of €12,500.The current exchange rate is €1.50/£1.00 and in the next period the exchange rate can increase to €2.40/£ or decrease to €0.9375/€1.00 . The current interest rates are i_€ = 3% and are i_£ = 4%. Choose the answer closest to yours.

Suppose the futures price is below the price predicted by IRP.What steps would assure an arbitrage profit?

Which equation is used to define the futures price?

From the perspective of the writer of a put option written on €62,500.If the strike price is $1.55/€,and the option premium is $1,875,at what exchange rate do you start to lose money?

A currency futures option amounts to a derivative on a derivative.Why would something like that exist?

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. spotRates Risk-treeRates (\ /) \ 1.60=1.00 i\ 3.00\% \ /£) \ 2.00=£1.00 i4.00\% /£) 1.25=£1.00 i£4.00\% Find the value today of your replicating today's portfolio in euro.

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

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. spotRates Risk-treeRates (\ /) \ 1.60=1.00 i\ 3.00\% \ /£) \ 2.00=£1.00 i4.00\% /£) 1.25=£1.00 i£4.00\% If the call finishes in-the-money what is your portfolio cash flow?

With regard to trading location,