Exam 7: Futures and Options on Foreign Exchange

Find the value of a call option written on €100 with a strike price of $1.00 = €1.00. In one period there are two possibilities: the exchange rate will move up by 15% or down by 15% . The U.S. risk-free rate is 5% over the period. The risk-neutral probability of dollar depreciation is ²/₃ and the risk-neutral probability of the dollar strengthening is ¹/₃.

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%.

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%.

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?

In reference to the futures market, a "speculator"

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%.

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

Which equation is used to define the futures price?

The Black-Scholes option pricing formulae

American call and put premiums

Comparing "forward" and "futures" exchange contracts, we can say that

The hedge ratio

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

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

Which of the following is correct?

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

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

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.

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?

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 with a strike price of $1.50 = €1.00. Immediate exercise of this option will generate a profit of