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

Consider an option to buy €12,500 for £10,000.In the next period,the euro can strengthen against the pound by 25 percent (i.e.,each euro will buy 25 percent more pounds)or weaken by 20 percent.
Big hint: don't round,keep exchange rates out to at least 4 decimal places.
 
$
\begin{array}{lll}
&spot Rates&Risk-tree Rates\
S_{0}(\$ / €) & \$ 1.60=€ 1.00&i \$ 3.00 \% \
S_{0}\left(\$ /  £)\right. & \$ 2.00=£ 1.00&i €4.00 \%  \
S_{0}\left(€ /£)\right. & € 1.25=£ 1.00&i £4.00 \%
\end{array}
$ Calculate the current €/£ spot exchange rate.

Accepted Answer

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

Question 3

In which market does a clearinghouse serve as a third party to all transactions?

Accepted Answer

A) Futures 
B) Forwards 
C) Swaps 
D) none of the options

Question 4

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 5

American call and put premiums

Accepted Answer

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

Question 6

Use the binomial option pricing model to find the value of a call option on £10,000 with a strike price of €12,500.The current exchange rate is €1.50/£1.00 and in the next period the exchange rate can increase to €2.40/£ or decrease to €0.9375/€1.00 .The current interest rates are i€ = 3% and are i£ = 4%.Choose the answer closest to yours.

Accepted Answer

A) €3,275 
B) €2,500 
C) €3,373 
D) €3,243

Question 7

Consider an option to buy €12,500 for £10,000.In the next period,the euro can strengthen against the pound by 25 percent (i.e.,each euro will buy 25 percent more pounds)or weaken by 20 percent.
Big hint: don't round,keep exchange rates out to at least 4 decimal places.
 
$
\begin{array}{lll}
&spot Rates&Risk-tree Rates\
S_{0}(\$ / €) & \$ 1.60=€ 1.00&i \$ 3.00 \% \
S_{0}\left(\$ /  £)\right. & \$ 2.00=£ 1.00&i €4.00 \%  \
S_{0}\left(€ /£)\right. & € 1.25=£ 1.00&i £4.00 \%
\end{array}
$ Calculate the hedge ratio.

Accepted Answer

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

Question 8

For European options,what is the effect of an increase in St?

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 9

For European options,what is the effect of an increase in the strike price E?

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 10

Consider an option to buy £10,000 for €12,500.In the next period,if the pound appreciates against the dollar by 37.5 percent then the euro will appreciate against the dollar by ten percent.On the other hand,the euro could depreciate against the pound by 20 percent.
Big hint: don't round,keep exchange rates out to at least 4 decimal places.
 
$
\begin{array}{lll}
&spot Rates&Risk-tree Rates\
S_{0}(\$ / €) & \$ 1.60=€ 1.00&i \$ 3.00 \% \
S_{0}\left(\$ /  £)\right. & \$ 2.00=£ 1.00&i €4.00 \%  \
S_{0}\left(€ /£)\right. & € 1.25=£ 1.00&i £4.00 \%
\end{array}
$ USING RISK NEUTRAL VALUATION (i.e.,the binomial option pricing model)find the value of the call (in euro).

Accepted Answer

The answer of Consider an option to buy £10,000 for...

Question 11

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 short 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) $2,000. 
C) $2,325. 
D) $3,425.

Question 12

Find the hedge ratio for a call option on £10,000 with a strike price of €12,500.The current exchange rate is €1.50/£1.00 and in the next period the exchange rate can increase to €2.40/£ or decrease to €0.9375/€1.00 . The current interest rates are i€ = 3% and are i£ = 4%.
Choose the answer closest to yours.

Accepted Answer

A) 5/9 
B) 8/13 
C) 2/3 
D) 3/8 
E) none of the options

Question 13

Suppose the futures price is below the price predicted by IRP.What steps would assure an arbitrage profit?

Accepted Answer

A) Go short in the spot market,go long in the futures contract. 
B) Go long in the spot market,go short in the futures contract. 
C) Go short in the spot market,go short in the futures contract. 
D) Go long in the spot market,go long in the futures contract.

Question 14

Which equation is used to define the futures price?

Accepted Answer

A)  $\frac { F ( \$ / € ) } { S ( \$ / € ) }$ = $\frac { 1 + i_{\$} } { 1 + i _{\€}}$ 
B)  $\frac { F ( \$ / € ) } { S ( \$ / € ) }$ = $\frac { 1 + i } { 1 + i }$ 
C)  $\frac { F ( \$ / € ) - S ( \$ / € ) } { S ( \$ / € ) }$ = $\frac { 1 + i_{\$} } { 1 + i_{€} }$ 
D) F($ / €)- S($ / €)= $\ddot { l } _ { S }$ - $i _ { \epsilon }$

Question 15

From the perspective of the writer of a put option written on €62,500.If the strike price is $1.55/€,and the option premium is $1,875,at what exchange rate do you start to lose money?

Accepted Answer

A) $1.52/€ 
B) $1.55/€ 
C) $1.58/€ 
D) none of the options

Question 16

A currency futures option amounts to a derivative on a derivative.Why would something like that exist?

Accepted Answer

A) For some assets,the futures contract can have lower transaction costs and greater liquidity than the underlying asset. 
B) Tax consequences matter as well,and for some users an option contract on a future is more tax efficient. 
C) Transaction costs and liquidity 
D) all of the options

Question 17

Consider an option to buy £10,000 for €12,500.In the next period,if the pound appreciates against the dollar by 37.5 percent then the euro will appreciate against the dollar by ten percent.On the other hand,the euro could depreciate against the pound by 20 percent.
Big hint: don't round,keep exchange rates out to at least 4 decimal places.
 
$
\begin{array}{lll}
&spot Rates&Risk-tree Rates\
S_{0}(\$ / €) & \$ 1.60=€ 1.00&i \$ 3.00 \% \
S_{0}\left(\$ /  £)\right. & \$ 2.00=£ 1.00&i €4.00 \%  \
S_{0}\left(€ /£)\right. & € 1.25=£ 1.00&i £4.00 \%
\end{array}
$ Find the value today of your replicating today's portfolio in euro.

Accepted Answer

The answer of Consider an option to buy £10,000 for...

Question 18

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 19

Consider an option to buy €12,500 for £10,000.In the next period,the euro can strengthen against the pound by 25 percent (i.e.,each euro will buy 25 percent more pounds)or weaken by 20 percent.
Big hint: don't round,keep exchange rates out to at least 4 decimal places.
 
$
\begin{array}{lll}
&spot Rates&Risk-tree Rates\
S_{0}(\$ / €) & \$ 1.60=€ 1.00&i \$ 3.00 \% \
S_{0}\left(\$ /  £)\right. & \$ 2.00=£ 1.00&i €4.00 \%  \
S_{0}\left(€ /£)\right. & € 1.25=£ 1.00&i £4.00 \%
\end{array}
$ If the call finishes in-the-money what is your portfolio cash flow?

Accepted Answer

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

Question 20

With regard to trading location,

Accepted Answer

A) forward contracts are traded competitively on organized exchanges. 
B) futures contracts are traded competitively on organized exchanges. 
C) futures contracts are traded by bank dealers via a network of telephones and computerized dealing systems. 
D) none of the options

Exam 7: Futures and Options on Foreign Exchange

What paradigm is used to define the futures price?

In which market does a clearinghouse serve as a third party to all transactions?

An "option" is

American call and put premiums

For European options,what is the effect of an increase in S_t?

For European options,what is the effect of an increase in the strike price E?

Suppose the futures price is below the price predicted by IRP.What steps would assure an arbitrage profit?

Which equation is used to define the futures price?

From the perspective of the writer of a put option written on €62,500.If the strike price is $1.55/€,and the option premium is $1,875,at what exchange rate do you start to lose money?

A currency futures option amounts to a derivative on a derivative.Why would something like that exist?

With regard to trading location,