Question 1

If the exchange rate's volatility is rising,and therefore the risk of the option not being exercised is decreasing,the option premium would be increasing.

Accepted Answer

A) True 
 B)False

Question 2

TABLE 7.1
Use the table to answer following question(s).
April 19, 2009, British Pound Option Prices (cents per pound, 62,500 pound contracts). 
-Refer to Table 7.1.The May call option on pounds with a strike price of 1440 mean:

Accepted Answer

A)  $88/£ per contract. 
B)  $0.88/£. 
C)  $0.0088/£. 
D)  none of the above

Question 3

Traders by using the historical volatility assume that the immediate future will be the same as the recent past,and the historical volatility will equal the forward-looking volatility.

Accepted Answer

A) True 
 B)False

Question 4

As long as the option has time remaining before expiration,the option will possess time the time value element.

Accepted Answer

A) True 
 B)False

Question 5

Dash Brevenshure works for the currency trading unit of ING Bank in London.He speculates that in the coming months the dollar will rise sharply vs.the pound.What should Dash do to act on his speculation?

Accepted Answer

A)  Buy a call on the pound. 
B)  Sell a call on the pound. 
C)  Buy a put on the pound. 
D)  Sell a put on the pound.

Question 6

TABLE 7.1
Use the table to answer following question(s).
April 19, 2009, British Pound Option Prices (cents per pound, 62,500 pound contracts). 
-Refer to Table 7.1.The exercise price of ________ giving the purchaser the right to sell pounds in June has a cost per pound of ________ for a total price of ________.

Accepted Answer

A)  1460; 0.68 cents; $425.00 
B)  1440; 1.06 cents; $662.50 
C)  1450; 1.02 cents; $637.50 
D)  1440; 1.42 cents; $887.50

Question 7

Peter Simpson thinks that the U.K.pound will cost $1.43/£ in six months.A 6-month currency futures contract is available today at a rate of $1.44/£.If Peter was to speculate in the currency futures market,and his expectations are correct,which of the following strategies would earn him a profit?

Accepted Answer

A)  Sell a pound currency futures contract. 
B)  Buy a pound currency futures contract. 
C)  Sell pounds today. 
D)  Sell pounds in six months.

Question 8

For a $1.50/£ call option with an initial premium of $0.033/£ and a phi value of -0.2,after an increase in the foreign interest (the pound sterling rate)rate from 8% to 9% - the new optiom premium would be:

Accepted Answer

A)  $0.035/£. 
B)  $1.48/£. 
C)  $0.031/£. 
D)  $0.032/£.

Question 9

The time value is asymmetric in value as you move away from the strike price (i.e.,the time value at two cents above the strike price is not necessarily the same as the time value two cents below the strike price).

Accepted Answer

A) True 
 B)False

Question 10

As a general statement,it is safe to say that businesses generally use the ________ for foreign currency option contracts,and individuals and financial institutions typically use the ________.

Accepted Answer

A)  exchange markets; over-the-counter 
B)  over-the-counter; exchange markets 
C)  private; government sponsored 
D)  government sponsored; private

Question 11

Which of the following statements is NOT true about currency option pricing sensitivities?

Accepted Answer

A)  The higher the delta, the more likely the option will move in-the-money 
B)  Premiums rise with increases in volatility 
C)  Premiums are relatively insensitive during the first days 
D)  Increases in domestic interest rates cause decreasing call option premiums

Question 12

Jasper Pernik is a currency speculator who enjoys "betting" on changes in the foreign currency exchange market.Currently the spot price for the Japanese yen is ¥129.87/$ and the 6-month forward rate is ¥128.53/$.Jasper thinks the yen will move to ¥128.00/$ in the next six months.If Jasper's expectations are correct,then he could profit in the forward market by ________ and then ________.

Accepted Answer

A)  buying yen for ¥128.00/$; selling yen at ¥128.53/$ 
B)  buying yen for ¥128.53/$; selling yen at ¥128.00/$ 
C)  There is not enough information to answer this question. 
D)  He could not profit in the forward market.

Question 13

The Phi of an option is defined as:

Accepted Answer

A)  expected change in the option premium for a small change in time to expiration. 
B)  expected change in the option premium for a small change in volatility. 
C)  expected change in the option premium for a small change in the foreign interest rate. 
D)  expected change in the option premium for a small change in the domestic interest rate.

Question 14

Which of the following is NOT a contract specification for currency futures trading on an organized exchange?

Accepted Answer

A)  size of the contract 
B)  maturity date 
C)  last trading day 
D)  All of the above are specified.

Question 15

Your U.S firm has an accounts payable denominated in UK pounds due in 6 months.To protect yourself against unexpected changes in the dollar/pound exchange rate you should:

Accepted Answer

A)  buy a pound put option. 
B)  sell a pound put option. 
C)  buy a pound call option. 
D)  sell a pound call option.

Question 16

Financial derivatives are powerful tools that can be used by management for purposes of:

Accepted Answer

A)  speculation. 
B)  hedging. 
C)  human resource management. 
D)  A and B above

Question 17

The higher the delta the greater the probability of the option expiring in-the-money.

Accepted Answer

A) True 
 B)False

Question 18

Compare and contrast foreign currency options and futures.Identify situations when you may prefer one vs.the other when speculating on foreign exchange.

Accepted Answer

The answer of Compare and contrast foreign currency options and...

Question 19

The primary problem with volatility is that it is unobservable; it is the only input into the option pricing formula that is determined subjectively by the trader pricing the option.

Accepted Answer

A) True 
 B)False

Question 20

A call option on UK pounds has a strike price of $2.05/£ and a cost of $0.02.What is the break-even price for the option?

Accepted Answer

A)  $2.03/£ 
B)  $2.07/£ 
C)  $2.05/£ 
D)  The answer depends upon if this is a long or a short call option.

Exam 7: Foreign Currency Derivatives: Futures and Options

If the exchange rate's volatility is rising,and therefore the risk of the option not being exercised is decreasing,the option premium would be increasing.

TABLE 7.1 Use the table to answer following question(s) . April 19, 2009, British Pound Option Prices (cents per pound, 62,500 pound contracts) . -Refer to Table 7.1.The May call option on pounds with a strike price of 1440 mean:

Traders by using the historical volatility assume that the immediate future will be the same as the recent past,and the historical volatility will equal the forward-looking volatility.

As long as the option has time remaining before expiration,the option will possess time the time value element.

Dash Brevenshure works for the currency trading unit of ING Bank in London.He speculates that in the coming months the dollar will rise sharply vs.the pound.What should Dash do to act on his speculation?

TABLE 7.1 Use the table to answer following question(s) . April 19, 2009, British Pound Option Prices (cents per pound, 62,500 pound contracts) . -Refer to Table 7.1.The exercise price of giving the purchaser the right to sell pounds in June has a cost per pound of for a total price of .

Peter Simpson thinks that the U.K.pound will cost $1.43/£ in six months.A 6-month currency futures contract is available today at a rate of $1.44/£.If Peter was to speculate in the currency futures market,and his expectations are correct,which of the following strategies would earn him a profit?

For a $1.50/£ call option with an initial premium of $0.033/£ and a phi value of -0.2,after an increase in the foreign interest (the pound sterling rate) rate from 8% to 9% - the new optiom premium would be:

The time value is asymmetric in value as you move away from the strike price (i.e.,the time value at two cents above the strike price is not necessarily the same as the time value two cents below the strike price).

As a general statement,it is safe to say that businesses generally use the for foreign currency option contracts,and individuals and financial institutions typically use the .

Which of the following statements is NOT true about currency option pricing sensitivities?

The Phi of an option is defined as:

Which of the following is NOT a contract specification for currency futures trading on an organized exchange?

Your U.S firm has an accounts payable denominated in UK pounds due in 6 months.To protect yourself against unexpected changes in the dollar/pound exchange rate you should:

Financial derivatives are powerful tools that can be used by management for purposes of:

The higher the delta the greater the probability of the option expiring in-the-money.

Compare and contrast foreign currency options and futures.Identify situations when you may prefer one vs.the other when speculating on foreign exchange.

The primary problem with volatility is that it is unobservable; it is the only input into the option pricing formula that is determined subjectively by the trader pricing the option.

A call option on UK pounds has a strike price of $2.05/£ and a cost of $0.02.What is the break-even price for the option?