Question 1

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 above B

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% (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. 
-Calculate the current €/£ spot exchange rate.

Accepted Answer

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

Question 3

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.For this option to be considered at-the-money,the strike price must be

Accepted Answer

A)  $1.60 = €1.00
B)  $1.55 = €1.00
C)  $1.55 * (1+i$) 3/12 = €1.00 * (1+i€) 3/12
D)  none of the above B

Question 4

If the call finishes in-the-money what is your replicating portfolio cash flow?

Accepted Answer

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

Question 5

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 6

Use your results from the last three questions to verify your earlier result for the value of the call.

Accepted Answer

The answer of Use your results from the last three...

Question 7

Yesterday,you entered into a futures contract to buy €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)  $1.4840 per €.

Question 8

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 9

In the CURRENCY TRADING section of The Wall Street Journal,the following appeared under the heading OPTIONS: Philadelphia Exchange

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 10

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 above

Question 11

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 = ?.

Accepted Answer

A)  $6,349.21
B)    $6,666.67=$20,000−(£10,000−£6,666.67) ×$4.00£1.00\$ 6,666.67 = \$ 20,000 - ( £ 10,000 - £ 6,666.67 )  	imes \frac { \$ 4.00 } { £ 1.00 }$6,666.67=$20,000−(£10,000−£6,666.67) ×£1.00$4.00​ 
C)    $6,666.67=£6,666.67×$1£1\$ 6,666.67 = £ 6,666.67 	imes \frac { \$ 1 } { £ 1 }$6,666.67=£6,666.67×£1$1​ 
D)  None of the above

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 above

Question 13

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 above

Question 14

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)    CuT−CdTS0(u−d) \frac { C _ { u T } - C _ { d T } } { S _ { 0 } ( u - d )  }S0​(u−d) CuT​−CdT​​ 
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 15

Empirical tests of the Black-Scholes option pricing formula

Accepted Answer

A)  have faced difficulties due to nonsynchronous data.
B)  suggest that when using simultaneous price data and incorporating transaction costs they conclude that the PHLX American currency options are efficiently priced.
C)  suggest that the European option-pricing model works well for pricing American currency options that are at- or out-of-the money, but does not do well in pricing in-the-money calls and puts.
D)  all of the above

Question 16

Yesterday,you entered into a futures contract to buy €62,500 at $1.50/€.Your initial margin was $3,750 (= 0.04 * €62,500 * $1.50/€ = 4 percent of the contract value in dollars).Your maintenance margin is $2,000 (meaning that your broker leaves you alone until your account balance falls to $2,000).At what settle price (use 4 decimal places)do you get a margin call?

Accepted Answer

A)  $1.4720/€
B)  $1.5280/€
C)  $1.500/€
D)  None of the above

Question 17

Use your results from the last three questions to verify your earlier result for the value of the call.

Accepted Answer

The answer of Use your results from the last three...

Question 18

With currency futures options the underlying asset is

Accepted Answer

A)  foreign currency.
B)  a call or put option written on foreign currency.
C)  a futures contract on the foreign currency.
D)  none of the above

Question 19

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 20

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...

Exam 7: Futures and Options on Foreign Exchange

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.For this option to be considered at-the-money,the strike price must be

If the call finishes in-the-money what is your replicating portfolio cash flow?

State the composition of the replicating portfolio; your answer should contain "trading orders" of what to buy and what to sell at time zero.

Use your results from the last three questions to verify your earlier result for the value of the call.

Yesterday,you entered into a futures contract to buy €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?

Which of the following is correct?

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?

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%.

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

The hedge ratio

Empirical tests of the Black-Scholes option pricing formula

Use your results from the last three questions to verify your earlier result for the value of the call.

With currency futures options the underlying asset is

Most exchange traded currency options

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.