Question 1

What paradigm is used to define the futures price?

Accepted Answer

A) IRP 
B) Hedge Ratio 
C) Black Scholes 
D) Risk Neutral Valuation

Question 2

Find the input d1 of the Black-Scholes price of a six-month call option on Japanese yen.The strike price is $1 = ¥100.The volatility is 25 percent per annum; r$ = 5.5% and r¥ = 6%.

Accepted Answer

A) d1 = 0.074246 
B) d1 = 0.005982 
C) d1 = $0.006137/¥ 
D) None of the above

Question 3

Using your results from parts a)and b)find the value of this put option (in €).
Your answer is worth zero points if it does not include currency symbols (€)!

Accepted Answer

The answer of Using your results from parts a)and b)find...

Question 4

Today's settlement price on a Chicago Mercantile Exchange (CME)Yen futures contract is $0.8011/¥100.Your margin account currently has a balance of $2,000.The next three days' settlement prices are $0.8057/¥100,$0.7996/¥100,and $0.7985/¥100.(The contractual size of one CME Yen contract is ¥12,500,000).If you have a long position in one futures contract,the changes in the margin account from daily marking-to-market,will result in the balance of the margin account after the third day to be

Accepted Answer

A) $1,425. 
B) $1,675. 
C) $2,000. 
D) $3,425.

Question 5

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.

Question 6

Comparing "forward" and "futures" exchange contracts,we can say that

Accepted Answer

A) they are both "marked-to-market" daily. 
B) their major difference is in the way the underlying asset is priced for future purchase or sale: futures settle daily and forwards settle at maturity. 
C) a futures contract is negotiated by open outcry between floor brokers or traders and is traded on organized exchanges, while forward contract is tailor-made by an international bank for its clients and is traded OTC. 
D) both b) and c)

Question 7

A put option on $15,000 with a strike price of €10,000 is the same thing as a call option on €10,000 with a strike price of $15,000.

Accepted Answer

A) True 
 B)False

Question 8

Find the value of a call option written on €100 with a strike price of $1.00 = €1.00.In one period there are two possibilities: the exchange rate will move up by 15% or down by 15% .The U.S.risk-free rate is 5% over the period.The risk-neutral probability of dollar depreciation is 2/3 and the risk-neutral probability of the dollar strengthening is 1/3.

Accepted Answer

A) $9.5238 
B) $0.0952 
C) $0 
D) $3.1746

Question 9

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 10

If the call finishes out-of-the-money what is your portfolio cash flow?

Accepted Answer

The answer of If the call finishes out-of-the-money what is...

Question 11

The Black-Scholes option pricing formulae

Accepted Answer

A) are used widely in practice, especially by international banks in trading OTC options. 
B) are not widely used outside of the academic world. 
C) work well enough, but are not used in the real world because no one has the time to flog their calculator for five minutes on the trading floor. 
D) none of the above

Question 12

The hedge ratio

Accepted Answer

A) Is the size of the long (short) position the investor must have in the underlying asset per option the investor must write (buy) to have a risk-free offsetting investment that will result in the investor perfectly hedging the option. 
B)   
C) Is related to the number of options that an investor can write without unlimited loss while holding a certain amount of the underlying asset. 
D) All of the above

Question 13

Find the input d1 of the Black-Scholes price of a six-month call option written on €100,000 with a strike price of $1.00 = €1.00.The current exchange rate is $1.25 = €1.00; The U.S.risk-free rate is 5% over the period and the euro-zone risk-free rate is 4%.The volatility of the underlying asset is 10.7 percent.

Accepted Answer

A) d1 = 0.103915 
B) d1 = 2.9871 
C) d1 = -0.0283 
D) none of the above

Question 14

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 option...

Question 15

In the CURRENCY TRADING section of The Wall Street Journal,the following appeared under the heading OPTIONS:  Which combination of the following statements are true? (i)- The time values of the 68 May and 69 May put options are respectively .30 cents and .50 cents.
(ii)- The 68 May put option has a lower time value (price)than the 69 May put option.
(iii)- If everything else is kept constant,the spot price and the put premium are inversely related.
(iv)- The time values of the 68 May and 69 May put options are,respectively,1.63 cents and 0.83 cents.
(v)- If everything else is kept constant,the strike price and the put premium are inversely related.

Accepted Answer

A) (i), (ii), and (iii) 
B) (ii), (iii), and (iv) 
C) (iii) and (iv) 
D) ( iv) and (v)

Question 16

Find the value of a one-year put option on $15,000 with a strike price of €10,000.In one year the exchange rate (currently S0($/€)= $1.50/€)can increase by 60% or decrease by 37.5% .The current one-year interest rate in the U.S.is i$ = 4% and the current one-year interest rate in the euro zone is i€ = 4%.

Accepted Answer

A) €1,525.52 
B) $3,328.40 
C) $4,992.60 
D) €2,218.94 
E) None of the above

Question 17

Which of the lines is a graph of the profit at maturity of writing a call option on €62,500 with a strike price of $1.20 = €1.00 and an option premium of $3,125?

Accepted Answer

A) A 
B) B 
C) C 
D) D

Question 18

Yesterday,you entered into a futures contract to sell €62,500 at $1.50 per €.Your initial performance bond is $1,500 and your maintenance level is $500.At what settle price will you get a demand for additional funds to be posted?

Accepted Answer

A) $1.5160 per €. 
B) $1.208 per €. 
C) $1.1920 per €. 
D) $1.1840 per €.

Question 19

Value a 1-year call option written on £10,000 with an exercise price of $2.00 = £1.00.The spot exchange rate is $2.00 = £1.00; The U.S.risk-free rate is 5% and the U.K.risk-free rate is also 5%.In the next year,the pound will either double in dollar terms or fall by half (i.e.u = 2 and d = ½).Hint: H = ⅔.

Accepted Answer

A) $6,349.21 
B)   
C)   
D) None of the above

Question 20

The volume of OTC currency options trading is

Accepted Answer

A) much smaller than that of organized-exchange currency option trading. 
B) much larger than that of organized-exchange currency option trading. 
C) larger, because the exchanges are only repackaging OTC options for their customers. 
D) none of the above

Exam 7: Futures and Options on Foreign Exchange