Question 1

You can speculate on an appreciation of the Japanese yen by a selling a yen put option and buying a yen call option
B selling a yen put option and selling a yen call option
C buying a yen put option and selling a yen call option
D buying a yen put option and buying a yen call option

A

Accepted Answer

Buying a yen call option allows you to profit if the yen appreciates, while selling a yen put option can also be profitable if the yen appreciates, as the put option would expire worthless.

Question 2

Fluor Corporation has just made a French franc bid on a major project located in France. It won't find out for 60 days whether it has won the contract. The best way to protect against currency risk on its bid is for Fluor to

A) buy a franc futures contract
B) sell a franc call option
C) sell a franc futures contract
D) buy a franc put option

D

Accepted Answer

Fluor Corporation can protect against currency risk on its bid by buying a franc put option. This would give the company the right, but not the obligation, to sell francs at a predetermined price at a future date. If the franc depreciates against the dollar, Fluor can exercise the option and sell francs at the predetermined price, thereby protecting itself against losses. If the franc appreciates against the dollar, Fluor can let the option expire and bid on other projects. This strategy limits Fluor's potential losses while allowing it to potentially profit from any currency movements in its favor.

Question 3

Suppose that the interbank forward bid for March 20 on Swiss francs is $0.7827 at the same time that the price of IMM Swiss franc futures for delivery on March 20 is $0.7795. How much of an arbitrage profit could a dealer earn per March Swiss franc futures contract of SFr 125,000?

A) $400
B) $68
C) $215
D) $58

A

Accepted Answer

A

Question 4

Suppose the current spot rate for the Australian dollar is U.S.$0.8321. The intrinsic value of an A$50,000 call option with an exercise price of U.S.$0.8195 is&#10;A) $0&#10;B) $630&#10;C) $740&#10;D) $2,340

Accepted Answer

The answer of Suppose the current spot rate for the...

Question 5

Suppose you are holding a long position in a French franc futures contract that matures in 76 days. The agreed?upon price is $0.15 for FF 250,000. At the close of trading today, the futures price has risen to $0.155. Under marking to market, you now

A) hold a futures contract that has risen in value by $1,250
B) hold a futures contract that has fallen in value by $625
C) will receive $1,250 and a new futures contract priced at $0.155
D) must pay over $1,250 to the seller of the futures contract

Accepted Answer

Under marking to market, the gain is realized daily. Since the futures price has risen from $0.15 to $0.155, you gain $0.005 per franc. For FF 250,000, this is $1,250. You receive this amount and a new contract at the current price of $0.155.

Question 6

Major advantages of futures contracts include the&#10;A) large number of currencies traded&#10;B) extensive delivery dates available c freedom to liquidate the contract at any time before its maturity&#10;D) all of the above

Accepted Answer

Futures contracts offer the advantage of liquidity, allowing traders to enter and exit positions before the contract's maturity, unlike the limited delivery dates or currency options.

Question 7

Suppose the current spot rate for the DM is $0.742A call option with an exercise price of $0.7550 is said to be&#10;A) in?the?money&#10;B) out?of?the?money&#10;C) at?the?money&#10;D) past breakeven

Accepted Answer

An option is in the money if exercising it now would generate a profit. In this case, since the exercise price of $0.7550 is higher than the current spot rate of $0.742, the option is out of the money.

Question 8

Which of the following has provided a major inducement for speculators to participate in the futures market?&#10;A) low margin requirements&#10;B) low bid?ask spreads&#10;C) high volume compared to the forward market&#10;D) all of the above

Accepted Answer

The answer of Which of the following has provided a...

Question 9

The time value of a European option a is always positive for an out?of?the?money option
B is always positive for an in?the?money option
C is always positive for an at?the?money option
D decreases with the time that remains until the option expires

Accepted Answer

The time value of an option is the extra value that an option holds other than its intrinsic value. It reflects the possibility of the option gaining intrinsic value before its expiration. As time passes, the time value of the option decreases, ceteris paribus, because there is less time for the underlying asset's price movements to work their magic on the option's returns. Moreover, an out-of-the-money option (choice A) has no intrinsic value, hence a very low or zero time value. Similarly, an at-the-money option (choice C) has less time value than an in-the-money option (choice B) due to its higher volatility and greater tendency to oscillate between being in-the-money and out-of-the-money.

Question 10

Suppose the current spot rate for the DM is $0.742A put option with an exercise price of $0.7550 is said to be&#10;A) in?the?money&#10;B) out?of?the?money&#10;C) at?the?money&#10;D) past breakeven

Accepted Answer

The put option is in-the-money because the spot rate is below the exercise price.

Question 11

Suppose the current spot rate for the DM is $0.5925. The call premium on a call option with an exercise price of $0.5675 is $0.0373. What is the time value of one DM 62,500 call option?&#10;A) $2,331.25&#10;B) $1,562.50&#10;C) $950.00&#10;D) $768.75

Accepted Answer

The answer of Suppose the current spot rate for the...

Question 12

The basic difference(s between forward and futures contracts is that&#10;A) forward contracts are individually tailored while futures contracts are standardized&#10;B) forward contracts are negotiated with banks whereas futures contracts are bought and sold on an organized exchange&#10;C) forward contracts have no daily limits on price fluctuations whereas futures contracts have a daily limit on price fluctuations&#10;D) all of the above

Accepted Answer

The answer of The basic difference(s between forward and futures...

Question 13

The major disadvantage of forward and futures contracts relative to options is that the forwards and futures contracts&#10;A) cannot protect the holder against the risk of adverse movements in exchange rates&#10;B) are more expensive&#10;C) are available only for relatively short maturities&#10;D) eliminate the possibility of gaining a windfall profit from favorable movements in exchange rates

Accepted Answer

The answer of The major disadvantage of forward and futures...

Question 14

A rise in the domestic interest rate will&#10;A) raise the value of foreign?currency call options and reduce the value of foreign?currency put options&#10;B) raise the value of foreign?currency put options and reduce the value of foreign?currency call options&#10;C) raise the value of both foreign?currency put and call options&#10;D) reduce the value of both foreign?currency put and call options

Accepted Answer

The answer of A rise in the domestic interest rate...

Question 15

Suppose the current spot rate for the DM is $0.5925. The call premium on a call option with an exercise price of $0.5675 is $0.0373. What is the intrinsic value of one DM 62,500 call option?&#10;A) $2,331.25&#10;B) $1,562.50&#10;C) $950.00&#10;D) $768.75

Accepted Answer

The answer of Suppose the current spot rate for the...

Question 16

The value of a European option always&#10;A) exceeds its intrinsic value&#10;B) rises with the time to maturity&#10;C) rises with the interest rate&#10;D) rises with the volatility of the exchange rate

Accepted Answer

The answer of The value of a European option always&#10;A)...

Question 17

A rise in the foreign interest rate will a raise the value of foreign?currency call options and lower the value of foreign?currency put options
B raise the value of foreign?currency put options and lower the value of foreign?currency call options
C raise the value of both foreign?currency put and call options
D reduce the value of both foreign?currency put and call options

Accepted Answer

The answer of A rise in the foreign interest rate...

Deck 7: Currency Futures and Options Markets