Question 1

The major difference between currency futures and forward contracts is that futures contracts are standardized for ease of trading on an exchange market whereas forward contracts are specialized and tailored to meet the needs of clients.

Accepted Answer

A) True 
 B)False

Question 2

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 3

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

Accepted Answer

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

Question 4

Which of the following is NOT a contract specification for currency futures trading on an organized exchange?

Accepted Answer

A)  size of the contract 
B)  maturity date 
C)  last trading day 
D)  All of the above are specified.

Question 5

A call option whose exercise price is less than the spot price is said to be:

Accepted Answer

A)  in-the-money. 
B)  at-the-money. 
C)  out-of-the-money. 
D)  under-the-spot.

Question 6

For a $1.50/£ call option with an initial premium of $0.033/£ and a rho value of 0.2, after an increase in the U.S. dollar rate from 8% to 9% - the new ATM option premium would be:

Accepted Answer

A)  $0.037/£. 
B)  $1.55/£. 
C)  $0.036/£. 
D)  $0.035/£.

Question 7

A call option on euros is written with a strike price of $1.30/euro. Which spot price maximizes your profit if you choose to exercise the option before maturity?

Accepted Answer

A)  $1.20/euro 
B)  $1.25/euro 
C)  $1.30/euro 
D)  $1.35/euro

Question 8

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 9

A foreign currency ________ option gives the holder the right to ________ a foreign currency, whereas a foreign currency ________ option gives the holder the right to ________ an option.

Accepted Answer

A)  call, buy, put, sell 
B)  call, sell, put, buy 
C)  put, hold, call, release 
D)  none of the above

Question 10

Historical volatility is the correct method for the calculation of the option volatility.

Accepted Answer

A) True 
 B)False

Question 11

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 12

A/An ________ option can be exercised only on its expiration date, whereas a/an ________ option can be exercised anytime between the date of writing up to and including the exercise date.

Accepted Answer

A)  American; European 
B)  American; British 
C)  Asian; American 
D)  European; American

Question 13

Which of the following is NOT a factor in determining the premium price of a currency option?

Accepted Answer

A)  the present spot rate 
B)  the time to maturity 
C)  the standard deviation of the daily spot price movement 
D)  All of the above are factors in determining the premium price.

Question 14

Most option profits and losses are realized through taking actual delivery of the currency rather than offsetting contracts.

Accepted Answer

A) True 
 B)False

Question 15

The buyer of a long call 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 an unlimited maximum gain potential. 
D)  all of the above

Question 16

The expected change in the option premium from a small change in the domestic interest rate (home currency) is term rho.

Accepted Answer

A) True 
 B)False

Question 17

As a general statement, it is safe to say that businesses generally use the ________ for foreign currency option contracts, and individuals and financial institutions typically use the ________.

Accepted Answer

A)  exchange markets; over-the-counter 
B)  over-the-counter; exchange markets 
C)  private; government sponsored 
D)  government sponsored; private

Question 18

Currency futures contracts have become standard fare and trade readily in the world money centers.

Accepted Answer

A) True 
 B)False

Question 19

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 20

Foreign currency options are available both over-the-counter and on organized exchanges.

Accepted Answer

A) True 
 B)False

Exam 7: Foreign Currency Derivatives: Futures and Options

The major difference between currency futures and forward contracts is that futures contracts are standardized for ease of trading on an exchange market whereas forward contracts are specialized and tailored to meet the needs of clients.

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.

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

Which of the following is NOT a contract specification for currency futures trading on an organized exchange?

A call option whose exercise price is less than the spot price is said to be:

For a $1.50/£ call option with an initial premium of $0.033/£ and a rho value of 0.2, after an increase in the U.S. dollar rate from 8% to 9% - the new ATM option premium would be:

A call option on euros is written with a strike price of $1.30/euro. Which spot price maximizes your profit if you choose to exercise the option before maturity?

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).

A foreign currency option gives the holder the right to a foreign currency, whereas a foreign currency option gives the holder the right to an option.

Historical volatility is the correct method for the calculation of the option volatility.

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

A/An option can be exercised only on its expiration date, whereas a/an option can be exercised anytime between the date of writing up to and including the exercise date.

Which of the following is NOT a factor in determining the premium price of a currency option?

Most option profits and losses are realized through taking actual delivery of the currency rather than offsetting contracts.

The buyer of a long call option:

The expected change in the option premium from a small change in the domestic interest rate (home currency) is term rho.

As a general statement, it is safe to say that businesses generally use the for foreign currency option contracts, and individuals and financial institutions typically use the .

Currency futures contracts have become standard fare and trade readily in the world money centers.

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?

Foreign currency options are available both over-the-counter and on organized exchanges.