Question 1

Option volatility is defined as the square root of the standard deviation of daily percentage changes in the underlying exchange rate.

Accepted Answer

A) True 
 B)False

Question 2

Why are foreign currency futures contracts more popular with individuals and banks while foreign currency forwards are more popular with businesses?

Accepted Answer

The answer of Why are foreign currency futures contracts more...

Question 3

Jasper Pernik is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market.Currently the spot price for the Japanese yen is ¥129.87/$ and the 6-month forward rate is ¥128.53/$.Jasper would earn a higher rate of return by buying yen and selling a forward contract than if he had invested her money in 6-month US Treasury securities at an annual rate of 2.50%.

Accepted Answer

A) True 
 B)False

Question 4

Compare and contrast foreign currency options and futures.Identify situations when you may prefer one vs.the other when speculating on foreign exchange.

Accepted Answer

The answer of Compare and contrast foreign currency options and...

Question 5

Dash Brevenshure works for the currency trading unit of ING Bank in London.He speculates that in the coming months the dollar will rise sharply vs.the pound.What should Dash do to act on his speculation?

Accepted Answer

A) Buy a call on the pound. 
B) Sell a call on the pound. 
C) Buy a put on the pound. 
D) Sell a put on the pound.

Question 6

The time value is asymmetric in value as you move away from the strike price (i.e. ,the time value at two cents above the strike price is not necessarily the same as the time value two cents below the strike price).

Accepted Answer

A) True 
 B)False

Question 7

If the rho of the specific option is known,it is easy to determine how the option's value will change as the spot rate changes.

Accepted Answer

A) True 
 B)False

Question 8

The Phi of an option is defined as:

Accepted Answer

A) expected change in the option premium for a small change in time to expiration. 
B) expected change in the option premium for a small change in volatility. 
C) expected change in the option premium for a small change in the foreign interest rate. 
D) expected change in the option premium for a small change in the domestic interest rate.

Question 9

The primary problem with volatility is that it is unobservable;it is the only input into the option pricing formula that is determined subjectively by the trader pricing the option.

Accepted Answer

A) True 
 B)False

Question 10

Jack Hemmings bought a 3-month British pound futures contract for $1.4400/£ only to see the dollar appreciate to a value of $1.4250 at which time he sold the pound futures.If each pound futures contract is for an amount of £62,500,how much money did Jack gain or lose from his speculation with pound futures?

Accepted Answer

A) $937.50 loss 
B) $937.50 gain 
C) £937.50 loss 
D) £937.50 gain

Question 11

If the exchange rate's volatility is rising,and therefore the risk of the option not being exercised is decreasing,the option premium would be increasing.

Accepted Answer

A) True 
 B)False

Question 12

Financial derivatives are powerful tools that can be used by management for purposes of:

Accepted Answer

A) speculation. 
B) hedging. 
C) human resource management. 
D) A and B above

Question 13

A call option on UK pounds has a strike price of $2.05/£ and a cost of $0.02.What is the break-even price for the option?

Accepted Answer

A) $2.03/£ 
B) $2.07/£ 
C) $2.05/£ 
D) The answer depends upon if this is a long or a short call option.

Question 14

For a $1.50/£ call option with an initial premium of $0.033/£ and a lambda of 0.4,after an increase in annual volatility of 1 percent point - for example from 10% to 11% - the new option premium would be:

Accepted Answer

A) $0.036/£. 
B) $0.037/£. 
C) $0.004/£. 
D) $1.54/£.

Question 15

The expected change in the option premium from a small change in the foreign interest rate (foreign currency)is term vega.

Accepted Answer

A) True 
 B)False

Question 16

Define and explain the logic for the time value of an option.Explain the value of the time value of an option for deep out-of-the money and deep in-the-money options.

Accepted Answer

The answer of Define and explain the logic for the...

Question 17

Traders by using the historical volatility assume that the immediate future will be the same as the recent past,and the historical volatility will equal the forward-looking volatility.

Accepted Answer

A) True 
 B)False

Question 18

If an American-style option possesses time value on any day up to expiration date,the option holder would get more by selling it than exercising it.

Accepted Answer

A) True 
 B)False

Question 19

Traders who believe volatilities will fall significantly in the near-term will:

Accepted Answer

A) sell futures now. 
B) buy options now. 
C) sell options now. 
D) buy futures now.

Question 20

TABLE 7.1
Use the table to answer following question(s).
April 19,2009,British Pound Option Prices (cents per pound,62,500 pound contracts).
 
-Refer to Table 7.1.The May call option on pounds with a strike price of 1440 mean:

Accepted Answer

A) $88/£ per contract. 
B) $0.88/£. 
C) $0.0088/£. 
D) none of the above

Exam 7: Foreign Currency Derivatives: Futures and Options

Option volatility is defined as the square root of the standard deviation of daily percentage changes in the underlying exchange rate.

Why are foreign currency futures contracts more popular with individuals and banks while foreign currency forwards are more popular with businesses?

Compare and contrast foreign currency options and futures.Identify situations when you may prefer one vs.the other when speculating on foreign exchange.

Dash Brevenshure works for the currency trading unit of ING Bank in London.He speculates that in the coming months the dollar will rise sharply vs.the pound.What should Dash do to act on his speculation?

The time value is asymmetric in value as you move away from the strike price (i.e. ,the time value at two cents above the strike price is not necessarily the same as the time value two cents below the strike price).

If the rho of the specific option is known,it is easy to determine how the option's value will change as the spot rate changes.

The Phi of an option is defined as:

The primary problem with volatility is that it is unobservable;it is the only input into the option pricing formula that is determined subjectively by the trader pricing the option.

If the exchange rate's volatility is rising,and therefore the risk of the option not being exercised is decreasing,the option premium would be increasing.

Financial derivatives are powerful tools that can be used by management for purposes of:

A call option on UK pounds has a strike price of $2.05/£ and a cost of $0.02.What is the break-even price for the option?

For a $1.50/£ call option with an initial premium of $0.033/£ and a lambda of 0.4,after an increase in annual volatility of 1 percent point - for example from 10% to 11% - the new option premium would be:

The expected change in the option premium from a small change in the foreign interest rate (foreign currency)is term vega.

Define and explain the logic for the time value of an option.Explain the value of the time value of an option for deep out-of-the money and deep in-the-money options.

Traders by using the historical volatility assume that the immediate future will be the same as the recent past,and the historical volatility will equal the forward-looking volatility.

If an American-style option possesses time value on any day up to expiration date,the option holder would get more by selling it than exercising it.

Traders who believe volatilities will fall significantly in the near-term will:

TABLE 7.1 Use the table to answer following question(s) . April 19,2009,British Pound Option Prices (cents per pound,62,500 pound contracts) . -Refer to Table 7.1.The May call option on pounds with a strike price of 1440 mean: