Deck 10: Currency Options

Question 1

The holder of a call currency option has:

A) the right to buy a currency
B) the right to sell a currency
C) the obligation to buy a currency
D) the obligation to sell a currency

Answer 1

the right to buy a currency

Question 2

The writer of a put currency option has:

A) the right to buy a currency
B) the right to sell a currency
C) the obligation to buy a currency
D) the obligation to sell a currency

Answer 2

the obligation to buy a currency

Question 3

The holder of a put currency option has:

A) the right to buy a currency
B) the right to sell a currency
C) the obligation to buy a currency
D) the obligation to sell a currency

Answer 3

the right to sell a currency

Question 4

The writer of a call currency option has:

A) the right to buy a currency
B) the right to sell a currency
C) the obligation to buy a currency
D) the obligation to sell a currency

Question 5

A 'naked' call currency option implies that:

A) the writer has no spot position in the underlying currency
B) the writer has a spot position in the underlying currency
C) the option can be exercised before the expiry date
D) the option cannot be exercised before the expiry date

Question 6

The exercise exchange rate is the rate at which:

A) the holder of a call option sells the underlying currency
B) the holder of a call option buys the underlying currency
C) the holder of a put option buys the underlying currency
D) none of the given answers

Question 7

The exercise exchange rate is the rate at which:

A) the holder of a call option sells the underlying currency
B) the writer of a call option buys the underlying currency
C) both the holder of a call option sells the underlying currency and the writer of a call option buys the underlying currency
D) none of the given answers

Question 8

If the spot exchange rate is greater than the exercise exchange rate, then:

A) the holder of a call option will exercise
B) the holder of a call option will not exercise
C) the writer of the option will buy the currency
D) both the holder of a call option will exercise and the writer of the option will buy the currency

Question 9

The difference between gross profit and net profit in option transactions is:

A) brokerage fees
B) the option premium
C) taxes
D) fixed costs

Question 10

A trader buys a call and a put option. The call option gives him the right to buy AUD1 million at an exercise exchange rate of 0.9000 (USD/AUD), whereas the put option gives him the right to sell AUD1 million at the same exercise exchange rate. If the exchange rate at expiry is 0.8500 will the trader exercise the options?

A) He will exercise both options
B) He will exercise the put but not the call option
C) He will exercise the call but not the put option
D) He will exercise neither option

Question 11

A trader buys a call option. The call option gives him the right to buy AUD1 million at an exercise exchange rate of 0.9000 (USD/AUD). Calculate the trader's gross profit on expiry, assuming the exchange rate is 0.9200 at expiry.

A) -AUD20,000
B) +USD20,000
C) +AUD20,000
D) -USD20,000

Question 12

A trader sells a put option. The put option requires him to buy AUD1 million at an exercise exchange rate of 0.9000 (USD/AUD). Calculate the trader's gross profit on expiry, assuming the exchange rate is 0.9300 at expiry.

A) zero
B) +USD30,000
C) +AUD30,000
D) -USD30,000

Question 13

A trader buys a call option at a premium of USD0.01. The call option gives him the right to buy AUD1 million at an exercise exchange rate of 0.9000 (USD/AUD). Calculate the trader's net profit on expiry, assuming the exchange rate is 0.9200 at expiry.

A) -AUD10,000
B) -USD10,000
C) +AUD10,000
D) +USD10,000

Question 14

A trader sells a put option at a premium of USD0.02. The put option requires him to buy AUD1 million at an exercise exchange rate of 0.9000 (USD/AUD). Calculate the trader's net profit on expiry, assuming the exchange rate is 0.9300 at expiry.

A) zero
B) +USD20,000
C) +AUD20,000
D) -USD20,000

Question 15

A trader buys a call and a put option. The call option gives him the right to buy AUD1 million at an exercise exchange rate of 0.9000 (USD/AUD), whereas the put option gives him the right to sell AUD1 million at the same exercise exchange rate. Calculate the trader's gross profit on expiry, assuming the exchange rate is 0.9100 at expiry.

A) -USD10,000
B) -AUD10,000
C) +AUD10,000
D) +USD10,000

Question 16

A trader buys a call at a premium of USD0.02 and a put option at a premium of USD0.01. The call option gives him the right to buy AUD1 million at an exercise exchange rate of 0.9000 (USD/AUD), whereas the put option gives him the right to sell AUD1 million at the same exercise exchange rate. Calculate the trader's net profit on expiry, assuming the exchange rate is 0.9500 at expiry.

A) +USD30,000
B) +USD10,000
C) +USD20,000
D) +USD50,000

Question 17

On the expiry date of a European call currency option, the holder:

A) must buy the specified amount of the underlying currency
B) may or may not buy the specified amount of the underlying currency
C) must sell the specified amount of the underlying currency
D) may or may not sell the specified amount of the underlying currency

Question 18

On the expiry date of a European call currency option, the writer:

A) must buy the specified amount of the underlying currency, if put
B) may or may not buy the specified amount of the underlying currency
C) must sell the specified amount of the underlying currency, if called
D) may or may not sell the specified amount of the underlying currency

Question 19

A long call position gives:

A) the right to sell a currency
B) a commitment to sell a currency
C) the right to buy a currency
D) a commitment to buy a currency

Question 20

A long put position gives:

A) the right to sell a currency
B) a commitment to sell a currency
C) the right to buy a currency
D) a commitment to buy a currency

Question 21

A short call position gives:

A) the right to sell a currency
B) a commitment to sell a currency
C) the right to buy a currency
D) a commitment to buy a currency

Question 22

A short put position gives:

A) the right to sell a currency
B) a commitment to sell a currency
C) the right to buy a currency
D) a commitment to buy a currency

Question 23

An American option is an option that:

A) is traded in America only
B) can be exercised on or before the expiry date
C) is issued by American companies
D) is only traded on the Chicago Board of Trade

Question 24

A European option is an option that:

A) is only traded on European exchanges
B) is only traded on LIFFE
C) can only be exercised on the expiry date
D) is only issued by European companies

Question 25

An option is in the money if it:

A) can be exercised at gross profit
B) can be exercised at net profit
C) has a zero intrinsic value
D) has a negative intrinsic value

Question 26

If an option is out of the money then its intrinsic value is:

A) zero
B) negative
C) positive
D) any of the given answers

Question 27

A long forward position can be constructed by combining:

A) a short call and a long put
B) a long call and a short put
C) a long call and a long put
D) a short call and a short put

Question 28

A trader replicates a long forward position using put and call options. The options' strike is 0.9000 (USD/AUD) and both their premiums are USD0.02.
Calculate the net payoff of the position if the spot exchange rate at expiry is 0.9300.

A) USD0.06
B) USD0.04
C) USD0.03
D) USD0.02

Question 29

A short forward position can be constructed by combining:

A) a short call and a long put
B) a long call and a short put
C) a long call and a long put
D) a short call and a short put

Question 30

A long straddle position can be constructed by combining:

A) a short call and a long put
B) a long call and a short put
C) a long call and a long put
D) a short call and a short put

Question 31

A short straddle position can be constructed by combining:

A) a short call and a long put
B) a long call and a short put
C) a long call and a long put
D) a short call and a short put

Question 32

A long strangle is similar to a long straddle except that:

A) a strangle is more risky
B) a strangle is more expensive
C) a strangle is cheaper
D) a straddle is more risky

Question 33

The higher the exercise rate:

A) the lower the premium on a call
B) the lower the premium on a put
C) the higher the premium on a call
D) both the lower the premium on a put and the higher the premium on a call

Question 34

The longer the time to expiry:

A) the lower the premium on a call
B) the higher the premium on a call
C) the higher the premium on a put
D) both the higher the premium on a call and the higher the premium on a put

Question 35

The higher the interest rate on the currency of purchase:

A) the higher the value of a put
B) the lower the value of a call
C) both the higher the value of a put and the lower the value of a call D. none of the given answers
D) Difficulty: Easy

Question 36

The higher the exchange rate volatility:

A) both the higher the value of a put and the lower the value of a call
B) the lower the value of a call
C) both the higher the value of a put and the higher the value of a call
D) none of the given answers

Question 37

A delta of 0.95 implies that the option is:

A) out of the money
B) in the money
C) at the money
D) any of the given answers, depending on other factors

Question 38

A high gamma implies:

A) a stable delta
B) a volatile delta
C) a zero delta
D) any of the given answers, depending on other factors

Question 39

A 'knock-out' option is:

A) a 'down and out' option
B) a 'barrier' option
C) designed to offer downside protection but only limited upside range before crossing a previously . specified barrier at which it expires automatically
D) any of the given answers

Question 40

An 'Asian' option is:

A) a 'path-dependent' option
B) is exercised at expiry if the average spot rate over the period is lower than the exercise exchange rate
C) an 'average strike' option
D) any of the given answers