Exam 7: Futures and Options on Foreign Exchange

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.

Consider an option to buy €12,500 for £10,000. In the next period, the euro can strengthen against the pound by 25% (i.e. each euro will buy 25% more pounds) or weaken by 20%. Big hint: don't round, keep exchange rates out to at least 4 decimal places. -Calculate the current €/£ spot exchange rate.

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

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

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

Use your results from the last three questions to verify your earlier result for the value of the call.

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?

Which of the following is correct?

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

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?

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 = ?.

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%.

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

The hedge ratio

Empirical tests of the Black-Scholes option pricing formula

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?

Use your results from the last three questions to verify your earlier result for the value of the call.

With currency futures options the underlying asset is

Most exchange traded currency options

Consider an option to buy €12,500 for £10,000. In the next period, the euro can strengthen against the pound by 25% (i.e. each euro will buy 25% more pounds) or weaken by 20%. Big hint: don't round, keep exchange rates out to at least 4 decimal places. -Draw the tree.