Question 1

American call and put premiums

Accepted Answer

A)  should be at least as large as their intrinsic value.
B)  should be at no larger than their moneyness.
C)  should be exactly equal to their time value.
D)  should be no larger than their speculative value. A

Question 2

Use the European option pricing formula to find the value 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)  0.005395
B)  0.005982
C)  $0.006137/¥
D)  None of the above C

Question 3

In reference to the futures market,a "speculator"

Accepted Answer

A)  attempts to profit from a change in the futures price
B)  wants to avoid price variation by locking in a purchase price of the underlying asset through a long position in the futures contract or a sales price through a short position in the futures contract
C)  stands ready to buy or sell contracts in unlimited quantity
D)  both b)  and c)  A

Question 4

Most exchange traded currency options

Accepted Answer

A)  mature every month, with daily resettlement.
B)  have original maturities of 1, 2, and 3 years.
C)  have original maturities of 3, 6, 9, and 12 months.
D)  mature every month, without daily resettlement.

Question 5

Consider an option to buy €12,500 for £10,000. In the next period, the euro can strengthen against the pound by 25% (i.e. each euro will buy 25% more pounds) or weaken by 20%.
Big hint: don't round, keep exchange rates out to at least 4 decimal places. 
-USING RISK NEUTRAL VALUATION find the value of the call (in pounds).

Accepted Answer

The answer of Consider an option to buy €12,500 for...

Question 6

Calculate the hedge ratio.

Accepted Answer

The answer of Calculate the hedge ratio....

Question 7

Find the value of a one-year call option on €10,000 with a strike price of $15,000.In one year the exchange rate (currently S0($/€)= $1.50/€)can increase by 60% or decrease by 37.5% .The current one-year interest rate in the U.S.is i$ = 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 8

Which of the follow options strategies are consistent in their belief about the future behavior of the underlying asset price?

Accepted Answer

A)  Selling calls and selling puts
B)  Buying calls and buying puts
C)  Buying calls and selling puts
D)  None of the above

Question 9

If you think that the dollar is going to appreciate against the euro,you should

Accepted Answer

A)  buy put options on the euro.
B)  sell call options on the euro.
C)  buy call options on the euro.
D)  none of the above

Question 10

Find the risk-neutral probability of an "up" move FOR YOUR TREE.Hint: you can't recycle your risk neutral probability from the call option.

Accepted Answer

The answer of Find the risk-neutral probability of an "up"...

Question 11

Consider an option to buy €12,500 for £10,000. In the next period, the euro can strengthen against the pound by 25% (i.e. each euro will buy 25% more pounds) or weaken by 20%.
Big hint: don't round, keep exchange rates out to at least 4 decimal places. 
-Draw the tree.

Accepted Answer

The answer of Consider an option to buy €12,500 for...

Question 12

Open interest in currency futures contracts

Accepted Answer

A)  tends to be greatest for the near-term contracts.
B)  tends to be greatest for the longer-term contracts.
C)  typically decreases with the term to maturity of most futures contracts.
D)  both a)  and c)

Question 13

The current spot exchange rate is $1.55 = €1.00 and the three-month forward rate is $1.60 = €1.00.Consider a three-month American call option on €62,500 with a strike price of $1.50 = €1.00.Immediate exercise of this option will generate a profit of

Accepted Answer

A)  $6,125
B)  $6,125/(1+i$) 3/12
C)  negative profit, so exercise would not occur
D)  $3,125

Question 14

For an American call option,A and B in the graph are

Accepted Answer

A)  time value and intrinsic value.
B)  intrinsic value and time value.
C)  in-the-money and out-of-the money.
D)  none of the above

Question 15

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 16

If a currency futures contract (direct quote)is priced below the price implied by Interest Rate Parity (IRP),arbitrageurs could take advantage of the mispricing by simultaneously

Accepted Answer

A)  going short in the futures contract, borrowing in the domestic currency, and going long in the foreign currency in the spot market.
B)  going short in the futures contract, lending in the domestic currency, and going long in the foreign currency in the spot market.
C)  going long in the futures contract, borrowing in the domestic currency, and going short in the foreign currency in the spot market.
D)  going long in the futures contract, borrowing in the foreign currency, and going long in the domestic currency, investing the proceeds at the local rate of interest.

Question 17

For European currency options written on euro with a strike price in dollars,what of the effect of an increase r€?

Accepted Answer

A)  Decrease the value of calls and puts ceteris paribus
B)  Increase the value of calls and puts ceteris paribus
C)  Decrease the value of calls, increase the value of puts ceteris paribus
D)  Increase the value of calls, decrease the value of puts ceteris paribus

Question 18

Which of the following is correct?

Accepted Answer

A)  European options can be exercised early.
B)  American options can be exercised early.
C)  Asian options can be exercised early.
D)  All of the above

Question 19

Consider a 1-year call option written on £10,000 with an exercise price of $2.00 = £1.00.The current exchange rate is $2.00 = £1.00; The U.S.risk-free rate is 5% over the period 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).If you write 1 call option,what is the value today (in dollars)of the hedge portfolio?

Accepted Answer

A)  £6,666.67
B)  £6,349.21
C)  $12,698.41
D)  $20,000
E)  None of the above

Question 20

For European currency options written on euro with a strike price in dollars,what of the effect of an increase in r$?

Accepted Answer

A)  Decrease the value of calls and puts ceteris paribus
B)  Increase the value of calls and puts ceteris paribus
C)  Decrease the value of calls, increase the value of puts ceteris paribus
D)  Increase the value of calls, decrease the value of puts ceteris paribus

Exam 7: Futures and Options on Foreign Exchange