Question 1

A call option on UK pounds has a strike price of $2.05/£ and a cost of $0.02. What is the break-even price for the option?
A) $2.03/£
B) $2.07/£
C) $2.05/£
D) The answer depends upon if this is a long or a short call option.

Accepted Answer

To find the break-even price for a call option, you need to add the strike price and the cost of the option. 
Break-even price = Strike price + Cost of option 
= $2.05/£ + $0.02 
= $2.07/£ 
Therefore, the answer is B.

Question 2

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

Accepted Answer

A European option can only be exercised on its expiration date, while an American option can be exercised at any time up to and including the expiration date.

Question 3

The price at which an option can be exercised is called the:
A) premium.
B) spot rate.
C) strike price.
D) commission.

Accepted Answer

The strike price is the price at which an option can be exercised, also known as the exercise price. The premium is the price paid to purchase the option, the spot rate is the current market price for an asset, and the commission is a fee charged by a broker for executing trades. Therefore, the correct answer is C.

Question 4

A call option on euros is written with a strike price of $1.30/euro. Which spot price maximizes your profit if you choose to exercise the option before maturity?
A) $1.20/euro
B) $1.25/euro
C) $1.30/euro
D) $1.35/euro

Accepted Answer

The profit from exercising a call option increases as the spot price of the underlying asset (in this case, euros) increases above the strike price. Since the strike price is $1.30/euro, a spot price of $1.35/euro maximizes your profit by providing the highest difference above the strike price.

Question 5

An option whose exercise price is equal to the spot rate is said to be:
A) in-the-money.
B) at-the-money.
C) out-of-the-money.
D) on-the-spot.

Accepted Answer

An option whose exercise price is equal to the spot rate is said to be "at-the-money." This means that the option holder would neither make a profit nor incur a loss if they were to exercise the option at its current price. It is neither "in-the-money" nor "out-of-the-money."

Question 6

Your U.S firm has an accounts payable denominated in UK pounds due in 6 months. To protect yourself against unexpected changes in the dollar/pound exchange rate you should:
A) buy a pound put option.
B) sell a pound put option.
C) buy a pound call option.
D) sell a pound call option.

Accepted Answer

Buying a pound call option will give the firm the right, but not the obligation, to buy pounds at a predetermined exchange rate (strike price) if the exchange rate were to increase, thereby protecting against unexpected changes in the dollar/pound exchange rate. Selling a pound put option, on the other hand, would give someone else the right to sell pounds to the firm at a predetermined exchange rate, which could potentially result in the firm having to pay more for the pounds than if they had simply bought a call option.

Question 7

As a general statement, it is safe to say that businesses generally use the ________ for foreign currency option contracts, and individuals and financial institutions typically use the ________.
A) exchange markets; over-the-counter
B) over-the-counter; exchange markets
C) private; government sponsored
D) government sponsored; private

Accepted Answer

Businesses typically use exchange markets, which are more formal and standardized, for foreign currency option contracts. On the other hand, individuals and financial institutions often use over-the-counter markets, which are more flexible and offer customized contracts to suit their specific needs.

Question 8

A put option on yen is written with a strike price of ¥105.00/$. Which spot price maximizes your profit if you choose to exercise the option before maturity?
A) ¥100/$
B) ¥105/$
C) ¥110/$
D) ¥115/$

Accepted Answer

The answer of A put option on yen is written...

Question 9

Dash Brevenshure works for the currency trading unit of ING Bank in London. He speculates that in the coming months the dollar will rise sharply vs. the pound. What should Dash do to act on his speculation?
A) Buy a call on the pound.
B) Sell a call on the pound.
C) Buy a put on the pound.
D) Sell a put on the pound.

Accepted Answer

If Dash believes that the dollar will rise sharply vs. the pound, he should buy a put on the pound. This would give him the right to sell pounds at a fixed price in the future, providing protection against a potential decline in the pound's value. Selling a call on the pound would give him the obligation to sell pounds at a fixed price in the future, which would not align with his speculation. Buying a call on the pound or selling a put on the pound would also not align with his speculation.

Question 10

Use the table to answer following question(s).
April 19, 2009, British Pound Option Prices (cents per pound, 62,500 pound contracts).
 
-Refer to Table 7.1. What was the closing price of the British pound on April 18, 2009?
A) $1.448/£
B) £1.448/$
C) $14.48/£
D) none of the above

Accepted Answer

The table shows option prices in cents per pound for contracts of 62,500 pounds. It does not show the exchange rate of pounds to dollars. Therefore, we cannot determine the exact closing price of the British pound on April 18, 2009, but we do know that the option price for a call option with a strike price of $1.45/£ was 3.10 cents per pound. This means that the market expected the pound to be worth more than $1.45/£ on April 19, 2009. Since $1.45 is the closest option strike price to the closing price of the British pound, it is likely that the closing price on April 18, 2009, was closest to $1.448/£, which is answer choice A.

Question 11

The maximum gain for the purchaser of a call option contract is ________ while the maximum loss is ________.
A) unlimited; the premium paid.
B) the premium paid; unlimited.
C) unlimited; unlimited.
D) unlimited; the value of the underlying asset.

Accepted Answer

The maximum gain for the purchaser of a call option contract is unlimited as there is no limit to how high the price of the underlying asset can go. However, the maximum loss is limited to the premium paid because this is the cost of purchasing the option contract.

Question 12

The buyer of a long call option:
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

Accepted Answer

The buyer of a long call option indeed has a maximum loss limited to the premium paid for the option (A), stands to gain or lose in a manner that is opposite to the writer of the call option (B), and has an unlimited maximum gain potential as the price of the underlying asset can theoretically rise indefinitely (C). Therefore, all of the given statements are correct.

Question 13

Use the table to answer following question(s).
April 19, 2009, British Pound Option Prices (cents per pound, 62,500 pound contracts).
 
-Refer to Table 7.1. The exercise price of ________ giving the purchaser the right to sell pounds in June has a cost per pound of ________ for a total price of ________.
A) 1460; 0.68 cents; $425.00
B) 1440; 1.06 cents; $662.50
C) 1450; 1.02 cents; $637.50
D) 1440; 1.42 cents; $887.50

Accepted Answer

The exercise price for June is 1440 and the cost per pound for a put option at that price is 1.06 cents, so the total cost for a 62,500 pound contract would be:
62,500 x 1.06 cents = $662.50

Question 14

The main advantage(s) of over-the-counter foreign currency options over exchange traded options is (are):
A) expiration dates tailored to the needs of the client.
B) amounts that are tailor made.
C) client desired expiration dates.
D) all of the above

Accepted Answer

Over-the-counter foreign currency options offer all of the advantages listed: expiration dates can be tailored to the needs of the client, the amounts can be tailor made, and the client can specify desired expiration dates. This flexibility is not available with exchange traded options.

Question 15

Which of the following is NOT true for the writer of a call option?
A) The maximum loss is unlimited.
B) The maximum gain is unlimited.
C) The gain or loss is equal to but of the opposite sign of the buyer of a call option.
D) All of the above are true.

Accepted Answer

The maximum gain for the writer of a call option is limited to the premium received for selling the option, not unlimited. Unlimited loss or gain applies to the buyer of a call option, not the seller/writer.

Question 16

A foreign currency ________ option gives the holder the right to ________ a foreign currency, whereas a foreign currency ________ option gives the holder the right to ________ an option.
A) call, buy, put, sell
B) call, sell, put, buy
C) put, hold, call, release
D) none of the above

Accepted Answer

A foreign currency call option gives the holder the right to buy a foreign currency at a specific price, while a foreign currency put option gives the holder the right to sell a foreign currency at a specific price. In this question, the first blank requires a type of option that gives the holder the right to buy, which is a call option. The second blank requires an action, which is to sell, and this is associated with a put option. Therefore, option A is the correct choice.

Question 17

A call option whose exercise price is less than the spot price is said to be:
A) in-the-money.
B) at-the-money.
C) out-of-the-money.
D) under-the-spot.

Accepted Answer

A call option with an exercise price that is less than the spot price is considered to be in-the-money, as the holder of the option can purchase the underlying asset at a price lower than its current market value.

Question 18

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

Accepted Answer

A European option can only be exercised on its expiration date, while an American option can be exercised at any time up to and including the expiration date.

Question 19

Use the table to answer following question(s).
April 19, 2009, British Pound Option Prices (cents per pound, 62,500 pound contracts).
 
-Refer to Table 7.1. The May call option on pounds with a strike price of 1440 means:
A) $88/£ per contract.
B) $0.88/£.
C) $0.0088/£.
D) none of the above

Accepted Answer

The correct interpretation of a call option with a strike price of 1440 is $0.0088/£, as options on currencies are typically quoted in terms of the currency per unit, and in this case, it implies $0.0088 per British pound.

Question 20

A call option whose exercise price exceeds the spot price is said to be:
A) in-the-money.
B) at-the-money.
C) out-of-the-money.
D) over-the-spot.

Accepted Answer

An option is said to be in-the-money when its exercise price is lower than the spot price, and the option holder can make a profit by exercising the option. An option is said to be at-the-money when its exercise price is equal to the spot price. An option is said to be out-of-the-money when its exercise price exceeds the spot price, and the option holder would not make a profit by exercising the option. Option D is not a valid term in options trading.

Quiz 7: Foreign Currency Derivatives: Futures and Options

A call option on UK pounds has a strike price of $2.05/£ and a cost of $0.02. What is the break-even price for the option?

A/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.

The price at which an option can be exercised is called the:

A call option on euros is written with a strike price of $1.30/euro. Which spot price maximizes your profit if you choose to exercise the option before maturity?

An option whose exercise price is equal to the spot rate is said to be:

Your U.S firm has an accounts payable denominated in UK pounds due in 6 months. To protect yourself against unexpected changes in the dollar/pound exchange rate you should:

As a general statement, it is safe to say that businesses generally use the for foreign currency option contracts, and individuals and financial institutions typically use the .

A put option on yen is written with a strike price of ¥105.00/$. Which spot price maximizes your profit if you choose to exercise the option before maturity?

Dash Brevenshure works for the currency trading unit of ING Bank in London. He speculates that in the coming months the dollar will rise sharply vs. the pound. What should Dash do to act on his speculation?

Use the table to answer following question(s) . April 19, 2009, British Pound Option Prices (cents per pound, 62,500 pound contracts) . -Refer to Table 7.1. What was the closing price of the British pound on April 18, 2009?

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

The buyer of a long call option:

Use the table to answer following question(s) . April 19, 2009, British Pound Option Prices (cents per pound, 62,500 pound contracts) . -Refer to Table 7.1. The exercise price of giving the purchaser the right to sell pounds in June has a cost per pound of for a total price of .

The main advantage(s) of over-the-counter foreign currency options over exchange traded options is (are) :

Which of the following is NOT true for the writer of a call option?

A foreign currency option gives the holder the right to a foreign currency, whereas a foreign currency option gives the holder the right to an option.

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

A/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.

Use the table to answer following question(s) . April 19, 2009, British Pound Option Prices (cents per pound, 62,500 pound contracts) . -Refer to Table 7.1. The May call option on pounds with a strike price of 1440 means:

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