Question 1

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

Accepted Answer

A) Go short in the spot market, go long in the futures contract. 
B) Go long in the spot market, go short in the futures contract. 
C) Go short in the spot market, go short in the futures contract. 
D) Go long in the spot market, go long in the futures contract. 
A) Go short in the spot market, go long in the futures contract. 
B) Go long in the spot market, go short in the futures contract. 
C) Go short in the spot market, go short in the futures contract. 
D) Go long in the spot market, go long in the futures contract.

Question 2

Find the hedge ratio for a put option on €10,000 with a strike price of $15,000.In one period the exchange rate (currently S($/€)= $1.50/€)can increase by 60% or decrease by 37.5% .

Accepted Answer

A) -15/49 
B) 8/13 
C) -5/13 
D) 15/49 
A) -15/49 
B) 8/13 
C) -5/13 
D) 15/49

Question 3

What paradigm is used to define the futures price?

Accepted Answer

A) IRP 
B) Hedge Ratio 
C) Black Scholes 
D) Risk Neutral Valuation 
A) IRP 
B) Hedge Ratio 
C) Black Scholes 
D) Risk Neutral Valuation

Question 4

An "option" is

Accepted Answer

A) a contract giving the seller (writer) of the option the right, but not the obligation, to buy (call) or sell (put) a given quantity of an asset at a specified price at some time in the future. 
B) a contract giving the owner (buyer) of the option the right, but not the obligation, to buy (call) or sell (put) a given quantity of an asset at a specified price at some time in the future. 
C) a contract giving the owner (buyer) of the option the right, but not the obligation, to buy (put) or sell (call) a given quantity of an asset at a specified price at some time in the future. 
D) a contract giving the owner (buyer) of the option the right, but not the obligation, to buy (put) or sell (sell) a given quantity of an asset at a specified price at some time in the future. 
A) a contract giving the seller (writer) of the option the right, but not the obligation, to buy (call) or sell (put) a given quantity of an asset at a specified price at some time in the future. 
B) a contract giving the owner (buyer) of the option the right, but not the obligation, to buy (call) or sell (put) a given quantity of an asset at a specified price at some time in the future. 
C) a contract giving the owner (buyer) of the option the right, but not the obligation, to buy (put) or sell (call) a given quantity of an asset at a specified price at some time in the future. 
D) a contract giving the owner (buyer) of the option the right, but not the obligation, to buy (put) or sell (sell) a given quantity of an asset at a specified price at some time in the future.

Question 5

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.  
-USING RISK NEUTRAL VALUATION (i.e.the binomial option pricing model)find the value of the call (in euro).

Accepted Answer

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

Question 6

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%.

Accepted Answer

Question 7

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

Accepted Answer

A) $1,425. 
B) $2,000. 
C) $2,325. 
D) $3,425. 
A) $1,425. 
B) $2,000. 
C) $2,325. 
D) $3,425.

Question 8

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) None of the above 
A)    
B)    
C) None of the above

Question 9

Verify that the dollar value of your put option equals the dollar value of your call.
Your answer is worth zero points if it does not include currency symbols ($,€)!

Accepted Answer

Write your

Question 10

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

Accepted Answer

The answer of State the composition of the replicating portfolio;...

Question 11

Consider the graph of a call option shown at right.The option is a three-month American call option on €62,500 with a strike price of $1.50 = €1.00 and an option premium of $3,125.What are the values of A,B,and C,respectively?

Accepted Answer

A) A = -$3,125 (or -$.05 depending on your scale); B = $1.50; C = $1.55 
B) A = -€3,750 (or -€.06 depending on your scale); B = $1.50; C = $1.55 
C) A = -$.05; B = $1.55; C = $1.60 
D) none of the above 
A) A = -$3,125 (or -$.05 depending on your scale); B = $1.50; C = $1.55 
B) A = -€3,750 (or -€.06 depending on your scale); B = $1.50; C = $1.55 
C) A = -$.05; B = $1.55; C = $1.60 
D) none of the above

Question 12

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.  
-Calculate the current €/£ spot exchange rate.

Accepted Answer

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

Question 13

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.  
-USING RISK NEUTRAL VALUATION find the value of the call (in pounds).

Accepted Answer

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

Question 14

Find the value of a one-year put option on $15,000 with a strike price of €10,000.In one year the exchange rate (currently S0($/€)= $1.50/€)can increase by 60% or decrease by 37.5% .The current one-year interest rate in the U.S.is i$ = 4% and the current one-year interest rate in the euro zone is i€ = 4%.

Accepted Answer

A) €1,525.52 
B) $3,328.40 
C) $4,992.60 
D) €2,218.94 
E) None of the above 
A) €1,525.52 
B) $3,328.40 
C) $4,992.60 
D) €2,218.94 
E) None of the above

Question 15

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.

Accepted Answer

A) True 
 B)False

Question 16

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 above 
A) 0.005395 
B) 0.005982 
C) $0.006137/¥ 
D) None of the above

Question 17

The current spot exchange rate is $1.55 = €1.00; the three-month U.S.dollar interest rate is 2%.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?

Accepted Answer

A) $0.05 * 62,500 = $3,125 
B) $3,125/1.02 = $3,063.73 
C) $0.00 
D) none of the above 
A) $0.05 * 62,500 = $3,125 
B) $3,125/1.02 = $3,063.73 
C) $0.00 
D) none of the above

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.  
-Draw the binomial tree for this option.

Accepted Answer

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

Question 19

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

Accepted Answer

A) (i), (ii), and (iii) 
B) (i), (ii), and (iv) 
C) (i), (iv), and (v) 
D) (ii) and (iii) 
A) (i), (ii), and (iii) 
B) (i), (ii), and (iv) 
C) (i), (iv), and (v) 
D) (ii) and (iii)

Question 20

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.

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

Find the hedge ratio for a put option on €10,000 with a strike price of $15,000.In one period the exchange rate (currently S($/€)= $1.50/€)can increase by 60% or decrease by 37.5% .

What paradigm is used to define the futures price?

An "option" is

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%.

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%.

Verify that the dollar value of your put option equals the dollar value of your call. Your answer is worth zero points if it does not include currency symbols ($,€)!

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

Consider the graph of a call option shown at right.The option is a three-month American call option on €62,500 with a strike price of $1.50 = €1.00 and an option premium of $3,125.What are the values of A,B,and C,respectively?

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.

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%.

The current spot exchange rate is $1.55 = €1.00; the three-month U.S.dollar interest rate is 2%.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?

A CME contract on €125,000 with September delivery

Globalization and the Multinational Firm

International Monetary System

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

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

Find the hedge ratio for a put option on €10,000 with a strike price of $15,000.In one period the exchange rate (currently S($/€)= $1.50/€)can increase by 60% or decrease by 37.5% .

What paradigm is used to define the futures price?

An "option" is

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%.

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%.

Verify that the dollar value of your put option equals the dollar value of your call. Your answer is worth zero points if it does not include currency symbols ($,€)!

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

Consider the graph of a call option shown at right.The option is a three-month American call option on €62,500 with a strike price of $1.50 = €1.00 and an option premium of $3,125.What are the values of A,B,and C,respectively?

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.

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%.

The current spot exchange rate is $1.55 = €1.00; the three-month U.S.dollar interest rate is 2%.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?

A CME contract on €125,000 with September delivery

Globalization and the Multinational Firm

International Monetary System

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

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%.

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%.

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%.