Deck 6: Currency Options and Options Markets

Question 1

In option contracts, one side has the obligation to perform if the other side forces the exchange. In futures contracts, both sides have the obligation to perform.

Answer 1

True

Question 2

American options are exercisable any time until expiration.

Answer 2

True

Question 3

The deliverable asset of a currency option is the currency being bought or sold.

Answer 3

True

Question 4

A currency call option is in-the-money when the exercise price is less than the underlying exchange rate.

Question 5

There is often an imbalance between the number of currency option contracts that are bought and sold on currency option exchanges.

Question 6

Volatility on spot exchange rates is much less than volatility on forward exchange rates.

Question 7

When you sell a put option on euros, you incur an obligation to buy euros at the option of the purchaser of the contract.

Question 8

European options are exercisable any time until expiration.

Question 9

Over-the-counter currency options are standardized to provide added liquidity.

Question 10

An option to buy pounds at a price of K^$/£ is equivalent to an option to sell dollars at K^£/$ = 1/K^$/£.

Question 11

A currency put option is in-the-money when the exercise price is greater than the underlying exchange rate.

Question 12

A currency call option is the right to sell the underlying currency at a specified price and within a specified period.

Question 13

There is little relation between currency spot and futures price volatilities.

Question 14

There is an active over-the-counter market in currency options operated by large commercial and investment banks.

Question 15

Currency options on spot and on futures prices are essentially equivalent in their ability to hedge currency risk.

Question 16

The holder of a currency call option has the right to buy one currency with another currency at the contract's exercise price.

Question 17

Currency options are traded only at organized options exchanges, such as the International Monetary Market of the Chicago Mercantile Exchange.

Question 18

A currency put option is the right to sell the underlying currency at a specified price and within a specified period.

Question 19

A short put on pounds (for dollars) is equivalent to a long call on dollars (for pounds).

Question 20

A foreign currency put option writer has the obligation to sell the underlying currency to the put option holder should the option be exercised.

Question 21

An option's time value is the difference between its market value and its intrinsic value.

Question 22

American call and put option values increase as volatility in the underlying asset increases, all else constant.

Question 23

Exchange-traded currency options are traded on ______.

A) currency forward prices
B) currency futures prices
C) spot currency values
D) Three of the above
E) Two of the above

Question 24

The time value of an option is the value of the option prior to exercise.

Question 25

Exchange-traded currency options do not have ______.

A) contractually determined contract sizes
B) contractually determined exercise prices
C) contractually determined market prices
D) contractually determined underlying assets
E) More than one of the above

Question 26

An option cannot be attached to ______.

A) corporate bonds
B) corporate investments
C) currency futures contracts
D) Eurodollar floating rate notes (FRNs)
E) each of the above can have an option component

Question 27

Historical volatility is the actual volatility realized over some historical period.

Question 28

Currency options are asymmetric in that, when an option holder gains, the option writer does not necessarily lose.

Question 29

A synthetic forward contract can be constructed by combining a long call with a short put on the same currency with exercise prices equal to the forward rate of exchange.

Question 30

A currency put option is out-of-the-money when the underlying exchange rate is below the exercise price.

Question 31

Which of the following is an inappropriate pair when applied to currency options?

A) American option $\equiv$ early exercise
B) call option $\equiv$ put option
C) exercise price $\equiv$ striking price
D) long position $\equiv$ short position
E) option writer $\equiv$ option seller

Question 32

The implied volatility of an option is the volatility implied by the option price and the observable determinants of option value.

Question 33

The value of a call option increases as time to expiration increases, all else constant.

Question 34

Over-the-counter currency options traded by commercial and investment banks ______.

A) are customized to fit the needs of the banks' customers
B) have expiration dates and contract amounts that are specified by the banks
C) have standardized commissions
D) typically give the short side of the contract to the customer
E) None of the above

Question 35

The intrinsic value of an option is the value of the option if exercised today.

Question 36

Put values increase as the underlying asset value increases, all else constant.

Question 37

One advantage of currency options traded on organized exchanges is that there are no margin requirements.

Question 38

The systematic risk of the underlying asset is an important determinant of option value.

Question 39

Exchange rate volatility measured in continuously compounded returns depends on the currency of reference.

Question 40

American call and put option values increase as time to expiration increases, all else constant.

Question 41

Consider a "SFr Dec 7000 call" selling on the Chicago Mercantile Exchange (CME) at a price of $0.0120/SFr. The current spot rate is $0.7090/SFr.

A) intrinsic value = $0.0000/SFr and time value = $0.0090/SFr
B) intrinsic value = $0.0000/SFr and time value = $0.0120/SFr
C) intrinsic value = $0.0090/SFr and time value = $0.0000/SFr
D) intrinsic value = $0.0090/SFr and time value = $0.0030/SFr
E) intrinsic value = $0.1200/SFr and time value = $0.0090/SFr

Question 42

The current spot rate of the HK$ against the pound is S₀^£/HK$ = £0.10/HK$. The standard deviation of continuously compounded annual changes is estimated to be 10%. What price is two standard deviations above the current exchange rate?

A) £0.1020/HK$
B) £0.1100/HK$
C) £0.1200/HK$
D) £0.1221/HK$
E) Cannot be determined from the information given

Question 43

Which of the following is most accurate?

A) Put-call parity relates call values to put values.
B) Put-call parity relates call and put values to the value of a forward contract.
C) Put-call parity relates call and put values to the value of a forward contract after adjusting for the present value of the exercise price.
D) Put-call parity relates call and put values to the value of a forward contract after adjusting for the present value of the exercise price and the systematic risk of the underlying asset.
E) None of the above is accurate.

Question 44

A portfolio of a long dollar call and a short dollar put at an exercise price K^€/$is equivalent to ______.

A) a long euro call and a short euro put
B) a long forward contract to buy dollars
C) a long forward contract to sell dollars
D) a short dollar call and a long dollar put
E) a headache waiting to happen

Question 45

Consider a "SFr Dec 7000 call" selling on the Chicago Mercantile Exchange (CME) at a price of $0.0180/SFr. Each CME Swiss franc contract is worth SFr125,000. What would be the profit on an investment in this option if the spot rate at expiration is $0.7320/SFr?

A) -$2,250
B) $0
C) $1,750
D) $2,250
E) $4,000

Question 46

Which of a) through d) is NOT a determinant of currency option values?

A) interest rates
B) the systematic risk of the underlying currency value
C) the underlying exchange rate
D) volatility in the underlying exchange rate
E) All of the above are determinants of currency option values.

Question 47

Consider a "C$ Dec 6000 call" selling on the Chicago Mercantile Exchange (CME) at a price of $0.0180/C$. Each CME C$ contract is worth C$125,000. What would be the profit on an investment in this option if the spot rate at expiration is $0.5930/C$?

A) -$2,250
B) $0
C) $1,750
D) $2,250
E) $4,000

Question 48

A currency option quote from a financial newspaper identifies ______.

A) the exchange on which the option is traded
B) the exercise price
C) the expiration date
D) Three of the above
E) Two of the above

Question 49

Exchange rate volatility over a future period can be estimated with ______.

A) implied volatility
B) reciprocal volatility
C) virtual volatility
D) More than one of the above
E) None of the above

Question 50

You form a long option straddle (a combination of a long call and a long put with the same exercise price) on the Mexican peso. Which of a) through c) results in a profit on your position?

A) a large decrease in the value of the Mexican peso
B) a large increase in the value of the Mexican peso
C) no change in the value of the Mexican peso
D) More than one of the above
E) None of the above

Question 51

The sensitivity of option value to change in the underlying asset value is called the ______.

A) option delta
B) option gamma
C) option sigma
D) option theta
E) option vega

Question 52

The standard deviation of continuously compounded changes in the £/$ spot rate is estimated to be $\sigma$ = 0.0082 = 0.82% per trading day. There are 252 business days in a year. Assuming zero volatility on nontrading days (weekends and holidays), what is the annual standard deviation of continuously compounded changes in the £/$ spot rate?

A) 13.02%
B) 15.11%
C) 206.64%
D) 228.20%
E) Cannot be determined from the information given

Question 53

A long put on pound sterling with a striking price of K^$/£ = $1.25/£ is ______.

A) an option to buy pound sterling with dollars
B) equivalent to a long call on dollars with a striking price of K^£/$ = £0.80/$
C) equivalent to a short call on dollars with a striking price of K^£/$ = £0.80/$
D) unlikely to have a positive market value
E) None of the above

Question 54

The ______ is the number of options required to offset one unit of the underlying asset.

A) hedge ratio
B) implied volatility
C) option volatility
D) stationary series
E) None of the above

Question 55

Consider a "C$ Dec 7000 put" selling on the Chicago Mercantile Exchange (CME) at a price of $0.0120/C$. Each CME C$ contract is worth C$125,000. What would be the profit on an investment in this option if the spot rate at expiration is $0.6760/C$?

A) -$1,500
B) $0
C) $1,500
D) $3,000
E) None of the above

Question 56

Which of the following is true?

A) As volatility increases, call values increase and put values decrease.
B) As volatility increases, call values decrease and put values increase.
C) As volatility increases, the values of both call and put options decrease.
D) As volatility increases, the values of both call and put options increase.
E) Call and put values are independent of volatility.

Question 57

An option writer _____ the exercise price on a call option and _____ the exercise price on a put option.

A) pays … pays
B) pays … receives
C) receives … pays
D) receives … receives
E) None of the above

Question 58

Which of the following is true?

A) Both call and put options lose more in value from spot rate decreases than they gain in value from spot rate increases of the same magnitude.
B) Both call and put options gain more in value from spot rate decreases than they lose in value from spot rate increases of the same magnitude.
C) Call options gain more in value from spot rate decreases than they lose in value from spot rate increases of the same magnitude.
D) Put options gain more in value from spot rate decreases than they lose in value from spot rate increases of the same magnitude.
E) None of the above are true.

Question 59

A long put option to sell pounds for dollars is identical to ______.

A) a long call option to buy dollars with pounds
B) a long call option to buy pounds for dollars
C) a short put option to sell dollars for pounds
D) a short put option to sell pounds for dollars
E) None of the above

Question 60

Consider a "SFr Dec 7000 put" selling on the Chicago Mercantile Exchange (CME) at a price of $0.0120/SFr. Each CME C$ contract is worth SFr125,000. What would be the profit on an investment in this option if the spot rate at expiration is $0.7120/SFr?

A) -$1,500
B) $0
C) $1,500
D) $3,000
E) None of the above

Question 61

The current spot rate of the Hong Kong dollar against the pound is S₀^£/HK$ = £0.10/HK$. The standard deviation of continuously compounded annual changes is estimated to be 10%. What price is two standard deviations below the current exchange rate?

A) £0.0778/HK$
B) £0.0800/HK$
C) £0.0819/HK$
D) £0.0900/HK$
E) Cannot be determined from the information given