Exam 7: Futures and Options on Foreign Exchange

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\% Find the risk neutral probability of an "up" move.

The current spot exchange rate is $1.55 = €1.00; the three-month U.S.dollar interest rate is 2 percent.Consider a three-month American call option on €62,500 with a strike price of $1.50 = €1.00.What is the least that this option should sell for?

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 of the call.

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 out-of-the-money what is your replicating portfolio cash flow?

A European option is different from an American option in that

Find 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 percent over the period and the euro-zone risk-free rate is 4 percent.The volatility of the underlying asset is 10.7 percent.

Which of the following is correct?

Which of the following is correct?

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\% Calculate the hedge ratio.

Yesterday,you entered into a futures contract to buy €62,500 at $1.50/€.Your initial margin was $3,750 (= 0.04 × €62,500 × $1.50/€ = 4 percent of the contract value in dollars).Your maintenance margin is $2,000 (meaning that your broker leaves you alone until your account balance falls to $2,000).At what settle price (use 4 decimal places)do you get a margin call?

For European currency options written on euro with a strike price in dollars,what is the effect of an increase in the exchange rate S($/€)?

In the CURRENCY TRADING section of The Wall Street Journal,the following appeared under the heading OPTIONS:

Philadelphia Exchange		Puts
Swiss France			69.33
62,500 Swiss Francs-cents per unit	Vol.		Last
68 May	12		0.30
69 May	50		0.50

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.

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 risk neutral probability of an "up" move.

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