Exam 7: Futures and Options on Foreign Exchange

Draw the tree for a put 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%.

The volume of OTC currency options trading is

Suppose that you have written a call option on €10,000 with a strike price in dollars.Suppose further that the hedge ratio is ¹/₂.Which of the following would be an appropriate hedge for a short position in this call option?

An investor believes that the price of a stock,say IBM's shares,will increase in the next 60 days.If the investor is correct,which combination of the following investment strategies will show a profit in all the choices? (i)buy the stock and hold it for 60 days (ii)buy a put option (iii)sell (write)a call option (iv)buy a call option (v)sell (write)a put option

With regard to contractual size,

Find the dollar value today of a 1-period at-the-money call option on ¥300,000.The spot exchange rate is ¥100 = $1.00.In the next period,the yen can increase in dollar value by 15 percent or decrease by 15 percent.The risk-free rate in dollars is i_$ = 5%; The risk-free rate in yen is i_¥ = 1%.

You have written a call option on £10,000 with a strike price of $20,000.The current exchange rate is $2.00/£1.00 and in the next period the exchange rate can increase to $4.00/£1.00 or decrease to $1.00/€1.00 .The current interest rates are i_$ = 3% and are i_£ = 2%.Find the hedge ratio and use it to create a position in the underlying asset that will hedge your option position.

Yesterday,you entered into a futures contract to buy €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?

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\% If the call finishes in-the-money what is your replicating portfolio cash flow?

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.

Empirical tests of the Black-Scholes option pricing formula

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

Suppose you observe the following one-year interest rates,spot exchange rates and futures prices.Futures contracts are available on €10,000.How much risk-free arbitrage profit could you make on one contract at maturity from this mispricing? Exchange Rate Interest Rate (\ /) \ 1.45=1.00 (\ /) \ 1.4=1.00 i\ 4\% i3\%

Which of the following is correct?

With currency futures options the underlying asset is

The hedge ratio

Which equation is used to define the futures price?

Find the dollar value today of a 1-period at-the-money call option on €10,000.The spot exchange rate is €1.00 = $1.25.In the next period,the euro can increase in dollar value to $2.00 or fall to $1.00.The interest rate in dollars is i_$ = 27.50%; the interest rate in euro is $i _ {€ } = 2 \%$ .

Open interest in currency futures contracts

With regard to expiration date,