Question 1

The major difference between currency futures and forward contracts is that futures contracts are standardized for ease of trading on an exchange market whereas forward contracts are specialized and tailored to meet the needs of clients.

Accepted Answer

A) True 
 B)False

Question 2

Foreign currency options are available both over-the-counter and on organized exchanges.

Accepted Answer

A) True 
 B)False

Question 3

A trader who is buying options of longer maturities will pay more,and proportionately more,for the longer maturity options.

Accepted Answer

A) True 
 B)False

Question 4

The sensitivity of the option premium to a small change in the spot exchange rate is called the gamma.

Accepted Answer

A) True 
 B)False

Question 5

A call option whose exercise price exceeds the spot price is said to be:

Accepted Answer

A)  in-the-money. 
B)  at-the-money. 
C)  out-of-the-money. 
D)  over-the-spot.

Question 6

For a $1.50/£ call option with an initial premium of $0.033/£ and a rho value of 0.2,after an increase in the U.S.dollar rate from 8% to 9% - the new ATM optiom premium would be:

Accepted Answer

A)  $0.037/£. 
B)  $1.55/£. 
C)  $0.036/£. 
D)  $0.035/£.

Question 7

A trader who is purchasing a call option on foreign currency should do so before the domestic interest rate rises.

Accepted Answer

A) True 
 B)False

Question 8

Why are foreign currency futures contracts more popular with individuals and banks while foreign currency forwards are more popular with businesses?

Accepted Answer

The answer of Why are foreign currency futures contracts more...

Question 9

As an option moves further in-the-money delta moves toward _______.

Accepted Answer

A)  0 
B)  -1 
C)  1 
D)  large numbers

Question 10

The value of a European style call option is the sum of two components:

Accepted Answer

A)  the present value plus the intrinsic value. 
B)  the time value plus the present value. 
C)  the intrinsic value plus the time value. 
D)  the intrinsic value plus the standard deviation.

Question 11

Define and explain the logic for the time value of an option.Explain the value of the time value of an option for deep out-of-the money and deep in-the-money options.

Accepted Answer

The answer of Define and explain the logic for the...

Question 12

Which of the following is NOT a factor in determining the premium price of a currency option?

Accepted Answer

A)  the present spot rate 
B)  the time to maturity 
C)  the standard deviation of the daily spot price movement 
D)  All of the above are factors in determining the premium price.

Question 13

The buyer of a long call option:

Accepted Answer

A)  has a maximum loss equal to the premium paid. 
B)  has a gain equal to but opposite in sign to the writer of the option. 
C)  has an unlimited maximum gain potential. 
D)  all of the above

Question 14

Traders who believe volatilities will fall significantly in the near-term will:

Accepted Answer

A)  sell futures now. 
B)  buy options now. 
C)  sell options now. 
D)  buy futures now.

Question 15

The Delta 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 spot rate. 
D)  expected change in the option premium for a small change in the domestic interest rate.

Question 16

The buyer (long)of a put option:

Accepted Answer

A)  has a maximum loss equal to the premium paid. 
B)  has a gain equal to but opposite in sign to the writer of the option. 
C)  has maximum gain potential limited to the difference between the strike price and the premium paid. 
D)  all of the above

Question 17

An ________ option can be exercised only on its expiration date,whereas a/an ________ option can be exercised anytime between the date of writing up to and including the exercise date.

Accepted Answer

A)  American; European 
B)  American; British 
C)  Asian; American 
D)  European; American

Question 18

About ________ of all futures contracts are settled by physical delivery of foreign exchange between buyer and seller.

Accepted Answer

A)  0% 
B)  5% 
C)  50% 
D)  95%

Question 19

The price of an option is always somewhat greater than its intrinsic value,since there is always some chance that the intrinsic value will rise between the present and the expiration date.

Accepted Answer

A) True 
 B)False

Question 20

The maximum gain for the purchaser of a call option contract is ________ while the maximum loss is ________.

Accepted Answer

A)  unlimited; the premium paid. 
B)  the premium paid; unlimited. 
C)  unlimited; unlimited. 
D)  unlimited; the value of the underlying asset.

Exam 7: Foreign Currency Derivatives: Futures and Options

The major difference between currency futures and forward contracts is that futures contracts are standardized for ease of trading on an exchange market whereas forward contracts are specialized and tailored to meet the needs of clients.

Foreign currency options are available both over-the-counter and on organized exchanges.

A trader who is buying options of longer maturities will pay more,and proportionately more,for the longer maturity options.

The sensitivity of the option premium to a small change in the spot exchange rate is called the gamma.

A call option whose exercise price exceeds the spot price is said to be:

For a $1.50/£ call option with an initial premium of $0.033/£ and a rho value of 0.2,after an increase in the U.S.dollar rate from 8% to 9% - the new ATM optiom premium would be:

A trader who is purchasing a call option on foreign currency should do so before the domestic interest rate rises.

Why are foreign currency futures contracts more popular with individuals and banks while foreign currency forwards are more popular with businesses?

As an option moves further in-the-money delta moves toward _______.

The value of a European style call option is the sum of two components:

Define and explain the logic for the time value of an option.Explain the value of the time value of an option for deep out-of-the money and deep in-the-money options.

Which of the following is NOT a factor in determining the premium price of a currency option?

The buyer of a long call option:

Traders who believe volatilities will fall significantly in the near-term will:

The Delta of an option is defined as:

The buyer (long) of a put option:

An option can be exercised only on its expiration date,whereas a/an option can be exercised anytime between the date of writing up to and including the exercise date.

About ________ of all futures contracts are settled by physical delivery of foreign exchange between buyer and seller.

The price of an option is always somewhat greater than its intrinsic value,since there is always some chance that the intrinsic value will rise between the present and the expiration date.

The maximum gain for the purchaser of a call option contract is while the maximum loss is .