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Futures and Options On Foreign Exchange

1) The document contains a series of multiple choice questions about futures, options, and foreign exchange. 2) The questions cover topics such as defining call and put options, calculating gains and losses on futures and options positions, and using pricing models like the binomial model. 3) Correct answers are indicated, as well as occasional feedback explaining incorrect answers.

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326 views

Futures and Options On Foreign Exchange

1) The document contains a series of multiple choice questions about futures, options, and foreign exchange. 2) The questions cover topics such as defining call and put options, calculating gains and losses on futures and options positions, and using pricing models like the binomial model. 3) Correct answers are indicated, as well as occasional feedback explaining incorrect answers.

Uploaded by

wxlim2
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Futures and Options on Foreign Exchange

The correct answer for each question is indicated by a 1 CORRECT A call option .

is a contract to buy a certain quantity of a specific underlying asset at a specific price at a specified date in the future. A) gives the holder the right, but not the obligation, to sell the underlying asset for a stated price over a stated time B)period. is an exchange-traded contract to buy a certain quantity of a specific underlying asset at a specific price at a specified C)date in the future. gives the holder the right, but not the obligation, to buy the underlying asset for a stated price over a stated time D)period. Feedback: Correct! 2 CORRECT Consider a put option written on 100,000. The strike price is $1.50 = 1.00 and the option premium is $0.02 per euro. What is the theoretical maximum gain on this position? There is unlimited upside potential. A)

$80,000 B)

$148,000 C)

$2,000 D) Feedback: Correct! 3 CORRECT Consider a trader who opens a short futures position. The contract size is 62,500, the maturity is six months, and the initial price is $1.50 = 1. The next day, the settlement price is $1.60 = 1. What is the amount of the trader's gain or loss? Gain of $6,250. A)

Loss of $6,250. B)

Gain of $2,604. C)

No gain or loss, since maturity has not arrived. D) Feedback: Correct! 4 CORRECT Consider a trader who buys a European call option on euro. The contract size is 62,500, the maturity is six months, and the strike price is $1.50 = 1. At maturity, the settlement price is $1.60 = 1. What is the amount of the trader's gain or loss? Gain of $6,250.

A)

Loss of $6,250. B)

Gain of $2,604. C)

No gain or loss, since expiry has not arrived. D) Feedback: Correct! 5 INCORRECT You have a call option on 10,000. Maturity is one year; the risk-free rate in dollars is 5% per annum. The euro is worth $1.50 today and in one year the euro will be worth either $1.60 or $1.40. The exercise price of the option is $1.50/. The one-year forward exchange rate is $1.55/. Use the binomial option pricing model to estimate the value of the call option described above. $0 A)

$714.29 B)

$476.19 C)

$13.64 D) Feedback: The correct equation is q = .75 = (1.55 1.40)/(1.60 1.40); C0 = [(.75$.10/110,000 + .25$0)/1.05, = $714.29/. 6 INCORRECT You have a call option for which maturity is one year and the risk-free rate in dollars is 5% per annum. In one year the euro will be worth either $1.60 or $1.40. The exercise price of the option is $1.50/. The one-year forward exchange rate is $1.55/. Calculate the hedge ratio for the call option described above. 0.50 A)

2.00 B)

2.20 C)

0.75 D) Feedback: The correct equation is h = (Cut Cdt)/S0(u d) = ($.10 - $0)/($1.60 1.40) = 0.50. 7 CORRECT For two otherwise-identical put options, the more valuable one will have a lower strike price. A) higher strike price.

B)

larger St. C)

larger r$. D) Feedback: Correct! 8 INCORRECT You have 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%. Use the European option pricing formula to find the value of the call option described above. $0.005395/ A)

$0.005982/ B)

$0.006137/ C)

None of the above. D) Feedback: The correct process is as follows:

Note: N(d) was calculated using NORMSDIST in Excel. 9 CORRECT Suppose you wish to speculate on a rise in the value of the euro. If you are correct and the value of the euro does indeed rise in the future, you would profit with a short position in a futures contract on the euro. A)

a long position in a futures contract on the euro. B)

a short position in a forward contract on the euro. C)

None of the above. D) Feedback: Correct!

10 CORRECT Consider a put option written on 100,000. The strike price is $1.50 = 1.00 and the option premium is $0.02. At what exchange rate will the buyer of this put option break even? $1.00 = .667 A)

$1.52 = 1.00 B)

$1.48 = 1.00 C)

$1.50 = 1.00 D)

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