Question 1

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

Accepted Answer

A) delivery of the underlying asset is seldom made in futures contracts. 
B) delivery of the underlying asset is usually made in forward contracts. 
C) delivery of the underlying asset is seldom made in either contract-they are typically cash settled at maturity. 
D) delivery of the underlying asset is seldom made in futures contracts and delivery of the underlying asset is usually made in forward contracts.

Question 2

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 options

Question 3

With regard to trading costs,

Accepted Answer

A) forward contracts involve the bid-ask spread plus the broker's commission. 
B) futures contracts involve the bid-ask spread plus the broker's commission. 
C) futures contracts involve the bid-ask spread plus indirect bank charges via compensating balance requirements. 
D) none of the options

Question 4

The one-step binomial model assumes that at the end of the option period,the call will have appreciated to SuT = S0u or depreciated to SdT = S0d.How is u calculated?

Accepted Answer

A) 1/d 
B) e^(σt0.5) 
C) both 1/d and e^(σt0.5) 
D) none of these options

Question 5

Three days ago,you entered into a futures contract to sell €62,500 at $1.50 per €.Over the past three days the contract has settled at $1.50,$1.52,and $1.54.How much have you made or lost?

Accepted Answer

A) Lost $0.04 per € or $2,500 
B) Made $0.04 per € or $2,500 
C) Lost $0.06 per € or $3,750 
D) none of the options

Question 6

For European currency options written on euro with a strike price in dollars,what is 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

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}
$ 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 8

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

Accepted Answer

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

Question 9

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 10

Yesterday,you entered into a futures contract to sell €75,000 at $1.79 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) $1.7767 per €. 
B) $1.2084 per €. 
C) $1.6676 per €. 
D) $1.1840 per €.

Question 11

Yesterday,you entered into a futures contract to buy €62,500 at $1.50 per €.Suppose the futures price closes today at $1.46.How much have you made/lost?

Accepted Answer

A) Depends on your margin balance. 
B) You have made $2,500.00. 
C) You have lost $2,500.00. 
D) You have neither made nor lost money,yet.

Question 12

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 options

Question 13

Empirical tests of the Black-Scholes option pricing formula

Accepted Answer

A) shows that binomial option pricing is used widely in practice,especially by international banks in trading OTC options. 
B) works well for pricing American currency options that are at-the-money or out-of-the-money. 
C) does not do well in pricing in-the-money calls and puts. 
D) works well for pricing American currency options that are at-the-money or out-of-the-money,but does not do well in pricing in-the-money calls and puts.

Question 14

Exercise of a currency futures option results in

Accepted Answer

A) a long futures position for the call buyer or put writer. 
B) a short futures position for the call buyer or put writer. 
C) a long futures position for the put buyer or call writer. 
D) a short futures position for the call buyer or put buyer.

Question 15

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 options

Question 16

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) 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,and a futures contract is negotiated by open outcry between floor brokers or traders and is traded on organized exchanges,while a forward contract is tailor-made by an international bank for its clients and is traded OTC.

Question 17

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 percent or down by 15 percent .The U.S.risk-free rate is 5 percent 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 18

For European currency options written on euro with a strike price in dollars,what is the effect of an increase in the exchange rate S(€/$)?

Accepted Answer

A) Decreases the value of calls and puts ceteris paribus 
B) Increases the value of calls and puts ceteris paribus 
C) Decreases the value of calls,increases the value of puts ceteris paribus 
D) Increases the value of calls,decreases the value of puts ceteris paribus

Question 19

Consider this graph of a call option.The option is a three-month American call option on €62,500 with a strike price of $1.50 = €1.00 and an option premium of $3,125.What are the values of A,B,and C,respectively?

Accepted Answer

A) A = $3,125 (or $.05 depending on your scale); B = $1.50; C = $1.55 
B) A = €3,750 (or €.06 depending on your scale); B = $1.50; C = $1.55 
C) A = $.05; B = $1.55; C = $1.60 
D) none of the options

Question 20

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}
$ 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 Consider an option to buy £10,000 for...

Exam 7: Futures and Options on Foreign Exchange

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

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

With regard to trading costs,

The one-step binomial model assumes that at the end of the option period,the call will have appreciated to S_uT = S₀u or depreciated to S_dT = S₀d.How is u calculated?

Three days ago,you entered into a futures contract to sell €62,500 at $1.50 per €.Over the past three days the contract has settled at $1.50,$1.52,and $1.54.How much have you made or lost?

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

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

Yesterday,you entered into a futures contract to sell €75,000 at $1.79 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?

Yesterday,you entered into a futures contract to buy €62,500 at $1.50 per €.Suppose the futures price closes today at $1.46.How much have you made/lost?

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%.

Empirical tests of the Black-Scholes option pricing formula

Exercise of a currency futures option results in

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

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

For European currency options written on euro with a strike price in dollars,what is the effect of an increase in the exchange rate S(€/$) ?

Consider this graph of a call option.The option is a three-month American call option on €62,500 with a strike price of $1.50 = €1.00 and an option premium of $3,125.What are the values of A,B,and C,respectively?