Question 1

TABLE 7.1
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 ________.

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 2

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?

Accepted Answer

To calculate the break-even price for a call option, you add the strike price to the cost of the option. So in this case, the break-even price would be $2.05/£ + $0.02/£ = $2.07/£. Therefore, the best choice is B.

Question 3

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

Accepted Answer

A call option is said to be in-the-money when the exercise price is lower than the spot price, meaning there is a profit to be made by exercising the option. At-the-money is when the exercise price equals the spot price. Therefore, a call option whose exercise price exceeds the spot price is out-of-the-money, meaning it is not profitable to exercise the option at this point in time.

Question 4

TABLE 7.1
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?

Accepted Answer

The correct format for expressing currency exchange rates in the context provided would typically be in the form of how much one unit of foreign currency is worth in local currency units, hence $1.448/£ indicates the value of one British pound in US dollars.

Question 5

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

Accepted Answer

The maximum gain for the writer of a call option is limited to the premium received for selling the option, not unlimited.

Question 6

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

Accepted Answer

An option is said to be in-the-money when the exercise price is lower than the spot price. This means that the option has intrinsic value and can be exercised for a profit.

Question 7

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.

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 8

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

Accepted Answer

The price at which an option can be exercised is called the strike price. The premium is the price paid for the option itself, the spot rate is the current market price for an asset, and commission is a fee paid to a broker for executing a trade.

Question 9

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.

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 10

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

Accepted Answer

Over-the-counter foreign currency options offer the advantage of tailoring expiration dates and amounts to the specific needs of the client, which is not possible with exchange traded options. Therefore, all of the above options (A, B, and C) are correct.

Question 11

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

Accepted Answer

An option whose exercise price is equal to the spot rate is said to be at-the-money.

Question 12

The buyer of a long call option:

Accepted Answer

A long call option gives the buyer the right, but not the obligation, to buy an asset at a specified price within a specific time period. The maximum loss the buyer can incur is the premium paid for the option (A). The gain or loss of the buyer is indeed opposite in sign to that of the writer of the option (B). Additionally, since the buyer can benefit from any increase in the asset's price above the strike price, the maximum gain potential is unlimited (C). Therefore, all of the statements are correct.

Question 13

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 ________.

Accepted Answer

Businesses tend to use exchange markets for foreign currency option contracts because they typically have larger transaction sizes and require more standardized contracts. Meanwhile, individuals and financial institutions tend to use over-the-counter options because they have more flexibility in terms of customization and smaller transaction sizes.

Question 14

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:

Accepted Answer

By buying a pound call option, the firm can have the right, but not the obligation, to buy pounds at a predetermined price (the strike price) in 6 months' time. This protects the firm against a potential rise in the dollar/pound exchange rate, as it allows them to purchase pounds at the agreed-upon price even if the exchange rate has gone up. If the exchange rate does not move in an unfavorable direction, the firm can choose not to exercise the option and instead buy pounds on the open market.

Question 15

TABLE 7.1
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 mean:

Accepted Answer

Looking at the table, we can see that the May call option on pounds with a strike price of 1440 has a price of 55. This price is in cents per pound, so we need to divide by 100 to get the price in dollars per pound. Thus, 55/100 = 0.55 dollars per pound. Finally, we need to divide by the strike price of 1440 to get the price per pound of the option. Thus, 0.55/1440 = 0.00038333 dollars per pound. Multiplying by 100 to get the price in cents per pound gives us 0.038333 or 0.0088/£. Therefore, the correct answer is C.

Question 16

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?

Accepted Answer

To act on his speculation that the dollar will rise sharply against the pound, Dash should buy a put on the pound. This will give him the right to sell pounds at a set price (strike price) in the future. If his speculation is correct and the value of the pound falls compared to the dollar, Dash will be able to sell the pounds at the strike price, which is higher than the market price, and make a profit.

Question 17

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?

Accepted Answer

The higher the spot price, the higher the profit from exercising the call option. Therefore, the best choice is the highest spot price offered as an option, which in this case is $1.35/euro.

Question 18

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?

Accepted Answer

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

Question 19

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.

Accepted Answer

A foreign currency CALL option gives the holder the right to BUY a foreign currency, whereas a foreign currency PUT option gives the holder the right to SELL a foreign currency. The second part of the statement is incorrect and does not make sense. Therefore, the correct choice is A.

Question 20

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

Accepted Answer

The maximum gain for the purchaser of a call option contract is unlimited as the underlying asset may rise in price without any limit. However, the maximum loss is limited to the premium paid, as the option holder can simply choose not to exercise the option if it is out of the money.

Quiz 7: Foreign Currency Derivatives: Futures and Options

TABLE 7.1 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 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 call option whose exercise price exceeds the spot price is said to be:

TABLE 7.1 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?

Which of the following is NOT true for the writer of a call 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.

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

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

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

The buyer of a long call option:

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 .

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:

TABLE 7.1 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 mean:

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 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 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 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.

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