Deck 7: Currency Futures and Options Markets

Question 1

You can speculate on an appreciation of the Japanese yen by a selling a yen put option and buying a yen call option
B selling a yen put option and selling a yen call option
C buying a yen put option and selling a yen call option
D buying a yen put option and buying a yen call option

Answer 1

A

Question 2

Fluor Corporation has just made a French franc bid on a major project located in France. It won't find out for 60 days whether it has won the contract. The best way to protect against currency risk on its bid is for Fluor to

A) buy a franc futures contract
B) sell a franc call option
C) sell a franc futures contract
D) buy a franc put option

Answer 2

D

Question 3

Suppose that the interbank forward bid for March 20 on Swiss francs is $0.7827 at the same time that the price of IMM Swiss franc futures for delivery on March 20 is $0.7795. How much of an arbitrage profit could a dealer earn per March Swiss franc futures contract of SFr 125,000?

A) $400
B) $68
C) $215
D) $58

Answer 3

A

Question 4

Suppose the current spot rate for the Australian dollar is U.S.$0.8321. The intrinsic value of an A$50,000 call option with an exercise price of U.S.$0.8195 is

A) $0
B) $630
C) $740
D) $2,340

Question 5

Suppose you are holding a long position in a French franc futures contract that matures in 76 days. The agreed?upon price is $0.15 for FF 250,000. At the close of trading today, the futures price has risen to $0.155. Under marking to market, you now

A) hold a futures contract that has risen in value by $1,250
B) hold a futures contract that has fallen in value by $625
C) will receive $1,250 and a new futures contract priced at $0.155
D) must pay over $1,250 to the seller of the futures contract

Question 6

Major advantages of futures contracts include the

A) large number of currencies traded
B) extensive delivery dates available c freedom to liquidate the contract at any time before its maturity
D) all of the above

Question 7

Suppose the current spot rate for the DM is $0.742A call option with an exercise price of $0.7550 is said to be

A) in?the?money
B) out?of?the?money
C) at?the?money
D) past breakeven

Question 8

Which of the following has provided a major inducement for speculators to participate in the futures market?

A) low margin requirements
B) low bid?ask spreads
C) high volume compared to the forward market
D) all of the above

Question 9

The time value of a European option a is always positive for an out?of?the?money option
B is always positive for an in?the?money option
C is always positive for an at?the?money option
D decreases with the time that remains until the option expires

Question 10

Suppose the current spot rate for the DM is $0.742A put option with an exercise price of $0.7550 is said to be

A) in?the?money
B) out?of?the?money
C) at?the?money
D) past breakeven

Question 11

Suppose the current spot rate for the DM is $0.5925. The call premium on a call option with an exercise price of $0.5675 is $0.0373. What is the time value of one DM 62,500 call option?

A) $2,331.25
B) $1,562.50
C) $950.00
D) $768.75

Question 12

The basic difference(s between forward and futures contracts is that

A) forward contracts are individually tailored while futures contracts are standardized
B) forward contracts are negotiated with banks whereas futures contracts are bought and sold on an organized exchange
C) forward contracts have no daily limits on price fluctuations whereas futures contracts have a daily limit on price fluctuations
D) all of the above

Question 13

The major disadvantage of forward and futures contracts relative to options is that the forwards and futures contracts

A) cannot protect the holder against the risk of adverse movements in exchange rates
B) are more expensive
C) are available only for relatively short maturities
D) eliminate the possibility of gaining a windfall profit from favorable movements in exchange rates

Question 14

A rise in the domestic interest rate will

A) raise the value of foreign?currency call options and reduce the value of foreign?currency put options
B) raise the value of foreign?currency put options and reduce the value of foreign?currency call options
C) raise the value of both foreign?currency put and call options
D) reduce the value of both foreign?currency put and call options

Question 15

Suppose the current spot rate for the DM is $0.5925. The call premium on a call option with an exercise price of $0.5675 is $0.0373. What is the intrinsic value of one DM 62,500 call option?

A) $2,331.25
B) $1,562.50
C) $950.00
D) $768.75

Question 16

The value of a European option always

A) exceeds its intrinsic value
B) rises with the time to maturity
C) rises with the interest rate
D) rises with the volatility of the exchange rate

Question 17

A rise in the foreign interest rate will a raise the value of foreign?currency call options and lower the value of foreign?currency put options
B raise the value of foreign?currency put options and lower the value of foreign?currency call options
C raise the value of both foreign?currency put and call options
D reduce the value of both foreign?currency put and call options