Question 1

Which of the following is NOT true for the writer of a call option?

Accepted Answer

A)  The maximum loss is unlimited. 
B)  The maximum gain is unlimited. 
C)  The gain or loss is equal to but of the opposite sign of the buyer of a call option. 
D)  All of the above are true.

Question 2

The majority of the option premium is lost in the final days prior to expiration.

Accepted Answer

A) True 
 B)False

Question 3

Standard foreign currency options are priced around the forward rate.

Accepted Answer

A) True 
 B)False

Question 4

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 5

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 6

A foreign currency ________ contract calls for the future delivery of a standard amount of foreign exchange at a fixed time, place, and price.

Accepted Answer

A)  futures 
B)  forward 
C)  option 
D)  swap

Question 7

For a $1.50/£ call option with an initial premium of $0.033/£ and a phi value of -0.2, after an increase in the foreign interest (the pound sterling rate) rate from 8% to 9% - the new option premium would be:

Accepted Answer

A)  $0.035/£. 
B)  $1.48/£. 
C)  $0.031/£. 
D)  $0.032/£.

Question 8

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/$. Jasper thinks the yen will move to ¥128.00/$ in the next six months. Jasper should ________ at ________ to profit from changing currency values.

Accepted Answer

A)  buy yen; the forward rate 
B)  buy dollars; the forward rate 
C)  sell yen; the forward rate 
D)  There is not enough information to answer this question.

Question 9

List and explain three "Greek" elements and their impact on a call option premium.

Accepted Answer

The answer of List and explain three "Greek" elements and...

Question 10

As long as the option has time remaining before expiration, the option will possess time the time value element.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statements regarding currency futures contracts and forward contracts is NOT true?

Accepted Answer

A)  A futures contract is a standardized amount per currency whereas the forward contact is for any size desired. 
B)  A futures contract is for a fixed maturity whereas the forward contract is for any maturity you like up to one year. 
C)  Futures contracts trade on organized exchanges whereas forwards take place between individuals and banks with other banks via telecom linkages. 
D)  All of the above are true.

Question 12

A speculator in the futures market wishing to lock in a price at which they could ________ a foreign currency will ________ a futures contract.

Accepted Answer

A)  buy; sell 
B)  sell; buy 
C)  buy; buy 
D)  none of the above

Question 13

As an option moves further in-the-money, delta moves toward ________.

Accepted Answer

A)  0 
B)  -1 
C)  1 
D)  large numbers

Question 14

The buyer (long) of a put option:

Accepted Answer

A)  has a maximum loss equal to the premium paid. 
B)  has a gain equal to but opposite in sign to the writer of the option. 
C)  has maximum gain potential limited to the difference between the strike price and the premium paid. 
D)  all of the above

Question 15

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 16

Assume that a call option has an exercise price of $1.50/£. At a spot price of $1.45/£, the call option has:

Accepted Answer

A)  a time value of $0.04. 
B)  a time value of $0.00. 
C)  an intrinsic value of $0.00. 
D)  an intrinsic value of -$0.04.

Question 17

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 means:

Accepted Answer

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

Question 18

A foreign currency ________ gives the purchaser the right, not the obligation, to buy a given amount of foreign exchange at a fixed price per unit for a specified period.

Accepted Answer

A)  future 
B)  forward 
C)  option 
D)  swap

Question 19

Futures contracts require that the purchaser deposit an initial sum as collateral. This deposit is called a:

Accepted Answer

A)  collateralized deposit. 
B)  marked market sum. 
C)  margin. 
D)  settlement.

Question 20

The writer of the option is referred to as the seller, and the buyer of the option is referred to as the holder.

Accepted Answer

A) True 
 B)False

Exam 7: Foreign Currency Derivatives: Futures and Options

Which of the following is NOT true for the writer of a call option?

The majority of the option premium is lost in the final days prior to expiration.

Standard foreign currency options are priced around the forward rate.

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.

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.

A foreign currency ________ contract calls for the future delivery of a standard amount of foreign exchange at a fixed time, place, and price.

For a $1.50/£ call option with an initial premium of $0.033/£ and a phi value of -0.2, after an increase in the foreign interest (the pound sterling rate) rate from 8% to 9% - the new option premium would be:

List and explain three "Greek" elements and their impact on a call option premium.

As long as the option has time remaining before expiration, the option will possess time the time value element.

Which of the following statements regarding currency futures contracts and forward contracts is NOT true?

A speculator in the futures market wishing to lock in a price at which they could a foreign currency will a futures contract.

As an option moves further in-the-money, delta moves toward ________.

The buyer (long) of a put option:

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

Assume that a call option has an exercise price of $1.50/£. At a spot price of $1.45/£, the call option has:

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 means:

A foreign currency ________ gives the purchaser the right, not the obligation, to buy a given amount of foreign exchange at a fixed price per unit for a specified period.

Futures contracts require that the purchaser deposit an initial sum as collateral. This deposit is called a:

The writer of the option is referred to as the seller, and the buyer of the option is referred to as the holder.