Question 1

Open interest in currency futures contracts

Accepted Answer

A) tends to be greatest for the near-term contracts. 
B) tends to be greatest for the longer-term contracts. 
C) typically decreases with the term to maturity of most futures contracts. 
D) both a and c 
A) tends to be greatest for the near-term contracts. 
B) tends to be greatest for the longer-term contracts. 
C) typically decreases with the term to maturity of most futures contracts. 
D) both a and c

Question 2

For European options, what of the effect of an increase in St?

Accepted Answer

A) Decrease the value of calls and puts ceteris paribus 
B) Increase the value of calls and puts ceteris paribus 
C) Decrease the value of calls, increase the value of puts ceteris paribus 
D) Increase the value of calls, decrease the value of puts ceteris paribus 
A) Decrease the value of calls and puts ceteris paribus 
B) Increase the value of calls and puts ceteris paribus 
C) Decrease the value of calls, increase the value of puts ceteris paribus 
D) Increase the value of calls, decrease the value of puts ceteris paribus

Question 3

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.

Accepted Answer

A) Buy £10,000 today at $2.00/£1.00 
B) Enter into a short position in a futures contract on £6,666.67 
C) Lend the present value of £6,666.67 today at i£ = 2% 
D) Enter into a long position in a futures contract on £6,666.67 
E) Both c and d would work
F) None of the above 
A) Buy £10,000 today at $2.00/£1.00 
B) Enter into a short position in a futures contract on £6,666.67 
C) Lend the present value of £6,666.67 today at i£ = 2% 
D) Enter into a long position in a futures contract on £6,666.67 
E) Both c and d would work
F) None of the above

Question 4

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

Accepted Answer

A) Decrease the value of calls and puts ceteris paribus 
B) Increase the value of calls and puts ceteris paribus 
C) Decrease the value of calls, increase the value of puts ceteris paribus 
D) Increase the value of calls, decrease the value of puts ceteris paribus 
A) Decrease the value of calls and puts ceteris paribus 
B) Increase the value of calls and puts ceteris paribus 
C) Decrease the value of calls, increase the value of puts ceteris paribus 
D) Increase the value of calls, decrease the value of puts ceteris paribus

Question 5

Which of the following is correct?

Accepted Answer

A) Time value = intrinsic value + option premium 
B) Intrinsic value = option premium + time value 
C) Option premium = intrinsic value - time value 
D) Option premium = intrinsic value + time value 
A) Time value = intrinsic value + option premium 
B) Intrinsic value = option premium + time value 
C) Option premium = intrinsic value - time value 
D) Option premium = intrinsic value + time value

Question 6

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

Accepted Answer

The answer of Find the risk neutral probability of an...

Question 7

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 8

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

Accepted Answer

A) Decrease the value of calls and puts ceteris paribus 
B) Increase the value of calls and puts ceteris paribus 
C) Decrease the value of calls, increase the value of puts ceteris paribus 
D) Increase the value of calls, decrease the value of puts ceteris paribus 
A) Decrease the value of calls and puts ceteris paribus 
B) Increase the value of calls and puts ceteris paribus 
C) Decrease the value of calls, increase the value of puts ceteris paribus 
D) Increase the value of calls, decrease the value of puts ceteris paribus

Question 9

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 10

A currency futures option amounts to a derivative on a derivative. Why would something like that exist?

Accepted Answer

A) For some assets, the futures contract can have lower transactions costs and greater liquidity than the underlying asset. 
B) Tax consequences matter as well, and for some users an option contract on a future is more tax efficient. 
C) Transactions costs and liquidity. 
D) All of the above 
A) For some assets, the futures contract can have lower transactions costs and greater liquidity than the underlying asset. 
B) Tax consequences matter as well, and for some users an option contract on a future is more tax efficient. 
C) Transactions costs and liquidity. 
D) All of the above

Question 11

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

Accepted Answer

A) Decrease the value of calls and puts ceteris paribus 
B) Increase the value of calls and puts ceteris paribus 
C) Decrease the value of calls, increase the value of puts ceteris paribus 
D) Increase the value of calls, decrease the value of puts ceteris paribus 
A) Decrease the value of calls and puts ceteris paribus 
B) Increase the value of calls and puts ceteris paribus 
C) Decrease the value of calls, increase the value of puts ceteris paribus 
D) Increase the value of calls, decrease the value of puts ceteris paribus

Question 12

Calculate the current €/£ spot exchange rate.

Accepted Answer

The answer of Calculate the current €/£ spot exchange rate....

Question 13

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 14

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

Accepted Answer

A) $1.60 = €1.00 
B) $1.55 = €1.00 
C) $1.55 × (1 + i$)3/12 = €1.00 × (1 + i€)3/12 
D) none of the above 
A) $1.60 = €1.00 
B) $1.55 = €1.00 
C) $1.55 × (1 + i$)3/12 = €1.00 × (1 + i€)3/12 
D) none of the above

Question 15

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%.

Accepted Answer

A) $3,308.82 
B) $0 
C) $3,294.12 
D) $4,218.75 
A) $3,308.82 
B) $0 
C) $3,294.12 
D) $4,218.75

Question 16

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

Accepted Answer

@#IMG-DLM&_TB2454_00

Question 17

Which of the following is correct?

Accepted Answer

A) The value (in dollars) of a call option on £5,000 with a strike price of $10,000 is equal to the value (in dollars) of a put option on $10,000 with a strike price of £5,000 only when the spot exchange rate is $2 = £1. 
B) The value (in dollars) of a call option on £5,000 with a strike price of $10,000 is equal to the value (in dollars) of a put option on $10,000 with a strike price of £5,000. 
A) The value (in dollars) of a call option on £5,000 with a strike price of $10,000 is equal to the value (in dollars) of a put option on $10,000 with a strike price of £5,000 only when the spot exchange rate is $2 = £1. 
B) The value (in dollars) of a call option on £5,000 with a strike price of $10,000 is equal to the value (in dollars) of a put option on $10,000 with a strike price of £5,000.

Question 18

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

Accepted Answer

The answer of USING RISK NEUTRAL VALUATION (i.e. the binomial...

Question 19

Calculate the hedge ratio.

Accepted Answer

The answer of Calculate the hedge ratio....

Question 20

Draw the tree.

Accepted Answer

The answer of Draw the tree....

Open interest in currency futures contracts

For European options, what of the effect of an increase in S_t?

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

Which of the following is correct?

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

An "option" is

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

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 currency futures option amounts to a derivative on a derivative. Why would something like that exist?

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

Calculate the current €/£ spot exchange rate.

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

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

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%.

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

Which of the following is correct?

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

Calculate the hedge ratio.

Draw the tree.

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

Open interest in currency futures contracts

For European options, what of the effect of an increase in St?

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

Which of the following is correct?

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

An "option" is

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

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 currency futures option amounts to a derivative on a derivative. Why would something like that exist?

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

Calculate the current €/£ spot exchange rate.

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

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

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%.

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

Which of the following is correct?

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

Calculate the hedge ratio.

Draw the tree.

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

For European options, what of the effect of an increase in S_t?

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

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%.