Deck 7: Futures and Options on Foreign Exchange

Question 1

Yesterday,you entered into a futures contract to buy €62,500 at $1.50 per €.Suppose the futures price closes today at $1.46.How much have you made/lost?

A)Depends on your margin balance.
B)You have made $2,500.00.
C)You have lost $2,500.00.
D)You have neither made nor lost money,yet.

Answer 1

C

Question 2

Yesterday,you entered into a futures contract to sell €75,000 at $1.79 per €.Your initial performance bond is $1,500 and your maintenance level is $500.At what settle price will you get a demand for additional funds to be posted?

A)$1.7767 per €.
B)$1.2084 per €.
C)$1.6676 per €.
D)$1.1840 per €.

Answer 2

A

Question 3

What paradigm is used to define the futures price?

A)IRP
B)Hedge Ratio
C)Black Scholes
D)Risk Neutral Valuation

Answer 3

A

Question 4

In reference to the futures market,a "speculator"

A)attempts to profit from a change in the futures price.
B)wants to avoid price variation by locking in a purchase price of the underlying asset through a long position in the futures contract or a sales price through a short position in the futures contract.
C)stands ready to buy or sell contracts in unlimited quantity.
D)wants to avoid price variation by locking in a purchase price of the underlying asset through a long position in the futures contract or a sales price through a short position in the futures contract,and also stands ready to buy or sell contracts in unlimited quantity.

Question 5

Comparing "forward" and "futures" exchange contracts,we can say that

A)they are both "marked-to-market" daily.
B)their major difference is in the way the underlying asset is priced for future purchase or sale: futures settle daily and forwards settle at maturity.
C)a futures contract is negotiated by open outcry between floor brokers or traders and is traded on organized exchanges,while forward contract is tailor-made by an international bank for its clients and is traded OTC.
D)their major difference is in the way the underlying asset is priced for future purchase or sale: futures settle daily and forwards settle at maturity,and a futures contract is negotiated by open outcry between floor brokers or traders and is traded on organized exchanges,while a forward contract is tailor-made by an international bank for its clients and is traded OTC.

Question 6

Yesterday,you entered into a futures contract to buy €62,500 at $1.50 per €.Your initial performance bond is $1,500 and your maintenance level is $500.At what settle price will you get a demand for additional funds to be posted?

A)$1.5160 per €.
B)$1.208 per €.
C)$1.1920 per €.
D)$1.4840 per €.

Question 7

Which equation is used to define the futures price?

A) $\frac { F ( \$ / € ) } { S ( \$ / € ) }$ = $\frac { 1 + i_{\$} } { 1 + i _{\€}}$
B) $\frac { F ( \$ / € ) } { S ( \$ / € ) }$ = $\frac { 1 + i } { 1 + i }$
C) $\frac { F ( \$ / € ) - S ( \$ / € ) } { S ( \$ / € ) }$ = $\frac { 1 + i_{\$} } { 1 + i_{€} }$
D)F($ / €)- S($ / €)= $\ddot { l } _ { S }$ - $i _ { \epsilon }$

Question 8

If a currency futures contract (direct quote)is priced below the price implied by Interest Rate Parity (IRP),arbitrageurs could take advantage of the mispricing by simultaneously

A)going short in the futures contract,borrowing in the domestic currency,and going long in the foreign currency in the spot market.
B)going short in the futures contract,lending in the domestic currency,and going long in the foreign currency in the spot market.
C)going long in the futures contract,borrowing in the domestic currency,and going short in the foreign currency in the spot market.
D)going long in the futures contract,borrowing in the foreign currency,and going long in the domestic currency,investing the proceeds at the local rate of interest.

Question 9

Which equation is used to define the futures price?

A) =
B) =
C) =
D) =

Question 10

A put option on $15,000 with a strike price of €10,000 is the same thing as a call option on €10,000 with a strike price of $15,000.

Question 11

In which market does a clearinghouse serve as a third party to all transactions?

A)Futures
B)Forwards
C)Swaps
D)none of the options

Question 12

A CME contract on €125,000 with September delivery

A)is an example of a forward contract.
B)is an example of a futures contract.
C)is an example of a put option.
D)is an example of a call option.

Question 13

Suppose the futures price is below the price predicted by IRP.What steps would assure an arbitrage profit?

A)Go short in the spot market,go long in the futures contract.
B)Go long in the spot market,go short in the futures contract.
C)Go short in the spot market,go short in the futures contract.
D)Go long in the spot market,go long in the futures contract.

Question 14

In the event of a default on one side of a futures trade,

A)the clearing member stands in for the defaulting party.
B)the clearing member will seek restitution for the defaulting party.
C)if the default is on the short side,a randomly selected long contract will not get paid.That party will then have standing to initiate a civil suit against the defaulting short.
D)the clearing member stands in for the defaulting party and will seek restitution for the defaulting party.

Question 15

Three days ago,you entered into a futures contract to sell €62,500 at $1.50 per €.Over the past three days the contract has settled at $1.50,$1.52,and $1.54.How much have you made or lost?

A)Lost $0.04 per € or $2,500
B)Made $0.04 per € or $2,500
C)Lost $0.06 per € or $3,750
D)none of the options

Question 16

Today's settlement price on a Chicago Mercantile Exchange (CME)yen futures contract is $0.8011/¥100.Your margin account currently has a balance of $2,000.The next three days' settlement prices are $0.8057/¥100,$0.7996/¥100,and $0.7985/¥100.(The contractual size of one CME yen contract is ¥12,500,000).If you have a short position in one futures contract,the changes in the margin account from daily marking-to-market will result in the balance of the margin account after the third day to be

A)$1,425.
B)$2,000.
C)$2,325.
D)$3,425.

Question 17

Comparing "forward" and "futures" exchange contracts,we can say that

A)delivery of the underlying asset is seldom made in futures contracts.
B)delivery of the underlying asset is usually made in forward contracts.
C)delivery of the underlying asset is seldom made in either contract-they are typically cash settled at maturity.
D)delivery of the underlying asset is seldom made in futures contracts and delivery of the underlying asset is usually made in forward contracts.

Question 18

Suppose you observe the following one-year interest rates,spot exchange rates and futures prices.Futures contracts are available on €10,000.How much risk-free arbitrage profit could you make on one contract at maturity from this mispricing?

A)$159.22
B)$153.10
C)$439.42
D)none of the options

Question 19

Yesterday,you entered into a futures contract to buy €62,500 at $1.50/€.Your initial margin was $3,750 (= 0.04 × €62,500 × $1.50/€ = 4 percent of the contract value in dollars).Your maintenance margin is $2,000 (meaning that your broker leaves you alone until your account balance falls to $2,000).At what settle price (use 4 decimal places)do you get a margin call?

A)$1.4720/€
B)$1.5280/€
C)$1.500/€
D)none of the options

Question 20

Today's settlement price on a Chicago Mercantile Exchange (CME)yen futures contract is $0.8011/¥100.Your margin account currently has a balance of $2,000.The next three days' settlement prices are $0.8057/¥100,$0.7996/¥100,and $0.7985/¥100.(The contractual size of one CME yen contract is ¥12,500,000).If you have a long position in one futures contract,the changes in the margin account from daily marking-to-market,will result in the balance of the margin account after the third day to be

A)$1,425.
B)$1,675.
C)$2,000.
D)$3,425

Question 21

Which of the follow options strategies are consistent in their belief about the future behavior of the underlying asset price?

A)Selling calls and selling puts
B)Buying calls and buying puts
C)Buying calls and selling puts
D)none of the options

Question 22

Exercise of a currency futures option results in

A)a long futures position for the call buyer or put writer.
B)a short futures position for the call buyer or put writer.
C)a long futures position for the put buyer or call writer.
D)a short futures position for the call buyer or put buyer.

Question 23

A European option is different from an American option in that

A)one is traded in Europe and one in traded in the United States.
B)European options can only be exercised at maturity; American options can be exercised prior to maturity.
C)European options tend to be worth more than American options,ceteris paribus.
D)American options have a fixed exercise price; European options' exercise price is set at the average price of the underlying asset during the life of the option.

Question 24

The current spot exchange rate is $1.55 = €1.00 and the three-month forward rate is $1.60 = €1.00.Consider a three-month American call option on €62,500.For this option to be considered at-the-money,the strike price must be

A)$1.60 = €1.00.
B)$1.55 = €1.00.
C)$1.55 × = €1.00 × .
D)none of the options

Question 25

If you think that the dollar is going to appreciate against the euro,you should

A)buy put options on the euro.
B)sell call options on the euro.
C)buy call options on the euro.
D)none of the options

Question 26

Which of the lines is a graph of the profit at maturity of writing a call option on €62,500 with a strike price of $1.20 = €1.00 and an option premium of $3,125?

A)A
B)B
C)C
D)D

Question 27

With currency futures options the underlying asset is

A)foreign currency.
B)a call or put option written on foreign currency.
C)a futures contract on the foreign currency.
D)none of the options

Question 28

Consider this graph of a call option.The option is a three-month American call option on €62,500 with a strike price of $1.50 = €1.00 and an option premium of $3,125.What are the values of A,B,and C,respectively?

A)A = $3,125 (or $.05 depending on your scale); B = $1.50; C = $1.55
B)A = €3,750 (or €.06 depending on your scale); B = $1.50; C = $1.55
C)A = $.05; B = $1.55; C = $1.60
D)none of the options

Question 29

Most exchange traded currency options

A)mature every month,with daily resettlement.
B)have original maturities of 1,2,and 3 years.
C)have original maturities of 3,6,9,and 12 months.
D)mature every month,without daily resettlement.

Question 30

In the CURRENCY TRADING section of The Wall Street Journal,the following appeared under the heading OPTIONS:

Philadelphia Exchange		Puts
Swiss France			69.33
62,500 Swiss Francs-cents per unit	Vol.		Last
68 May	12		0.30
69 May	50		0.50

Which combination of the following statements are true?
(i)The time values of the 68 May and 69 May put options are respectively .30 cents and .50 cents.
(ii)The 68 May put option has a lower time value (price)than the 69 May put option.
(iii)If everything else is kept constant,the spot price and the put premium are inversely related.
(iv)The time values of the 68 May and 69 May put options are,respectively,1.63 cents and 0.83 cents.
(v)If everything else is kept constant,the strike price and the put premium are inversely related.

A)(i),(ii),and (iii)
B)(ii),(iii),and (iv)
C)(iii)and (iv)
D)(iv)and (v)

Question 31

From the perspective of the writer of a put option written on €62,500.If the strike price is $1.55/€,and the option premium is $1,875,at what exchange rate do you start to lose money?

A)$1.52/€
B)$1.55/€
C)$1.58/€
D)none of the options

Question 32

The current spot exchange rate is $1.55 = €1.00 and the three-month forward rate is $1.60 = €1.00.Consider a three-month American call option on €62,500 with a strike price of $1.50 = €1.00.Immediate exercise of this option will generate a profit of

A)$6,125.
B)$6,125/(1 + )^3/12.
C)negative profit,so exercise would not occur.
D)$3,125.

Question 33

An investor believes that the price of a stock,say IBM's shares,will increase in the next 60 days.If the investor is correct,which combination of the following investment strategies will show a profit in all the choices? (i)buy the stock and hold it for 60 days
(ii)buy a put option
(iii)sell (write)a call option
(iv)buy a call option
(v)sell (write)a put option

A)(i),(ii),and (iii)
B)(i),(ii),and (iv)
C)(i),(iv),and (v)
D)(ii)and (iii)

Question 34

The volume of OTC currency options trading is

A)much smaller than that of organized-exchange currency option trading.
B)much larger than that of organized-exchange currency option trading.
C)larger,because the exchanges are only repackaging OTC options for their customers.
D)none of the options

Question 35

Open interest in currency futures contracts

A)tends to be greatest for the near-term contracts.
B)tends to be greatest for the longer-term contracts.
C)typically decreases with the term to maturity of most futures contracts.
D)tends to be greatest for the near-term contracts,and typically decreases with the term to maturity of most futures contracts.

Question 36

The "open interest" shown in currency futures quotations is

A)the total number of people indicating interest in buying the contracts in the near future.
B)the total number of people indicating interest in selling the contracts in the near future.
C)the total number of people indicating interest in buying or selling the contracts in the near future.
D)the total number of long or short contracts outstanding for the particular delivery month.

Question 37

The current spot exchange rate is $1.55 = €1.00 and the three-month forward rate is $1.60 = €1.00.Consider a three-month American call option on €62,500 with a strike price of $1.50 = €1.00.If you pay an option premium of $5,000 to buy this call,at what exchange rate will you break-even?

A)$1.58 = €1.00
B)$1.62 = €1.00
C)$1.50 = €1.00
D)$1.68 = €1.00

Question 38

A currency futures option amounts to a derivative on a derivative.Why would something like that exist?

A)For some assets,the futures contract can have lower transaction costs and greater liquidity than the underlying asset.
B)Tax consequences matter as well,and for some users an option contract on a future is more tax efficient.
C)Transaction costs and liquidity
D)all of the options

Question 39

An "option" is

A)a contract giving the seller (writer)of the option the right,but not the obligation,to buy (call)or sell (put)a given quantity of an asset at a specified price at some time in the future.
B)a contract giving the owner (buyer)of the option the right,but not the obligation,to buy (call)or sell (put)a given quantity of an asset at a specified price at some time in the future.
C)a contract giving the owner (buyer)of the option the right,but not the obligation,to buy (put)or sell (call)a given quantity of an asset at a specified price at some time in the future.
D)a contract giving the owner (buyer)of the option the right,but not the obligation,to buy (put)or sell (sell)a given quantity of an asset at a specified price at some time in the future.

Question 40

The current spot exchange rate is $1.55 = €1.00; the three-month U.S.dollar interest rate is 2 percent.Consider a three-month American call option on €62,500 with a strike price of $1.50 = €1.00.What is the least that this option should sell for?

A)$0.05 × 62,500 = $3,125
B)$3,125/1.02 = $3,063.73
C)$0.00
D)none of the options

Question 41

Which of the following is correct?

A)European options can be exercised early.
B)American options can be exercised early.
C)Asian options can be exercised early.
D)all of the options

Question 42

For an American call option,A and B in the graph are

A)time value and intrinsic value.
B)intrinsic value and time value.
C)in-the-money and out-of-the money.
D)none of the options

Question 43

Find the value of a call option written on €100 with a strike price of $1.00 = €1.00.In one period,there are two possibilities: the exchange rate will move up by 15 percent or down by 15 percent .The U.S.risk-free rate is 5 percent over the period.The risk-neutral probability of dollar depreciation is ²/₃ and the risk-neutral probability of the dollar strengthening is ¹/₃.

A)$9.5238
B)$0.0952
C)$0
D)$3.1746

Question 44

For European currency options written on euro with a strike price in dollars,what is the effect of an increase in the exchange rate S(€/$)?

A)Decreases the value of calls and puts ceteris paribus
B)Increases the value of calls and puts ceteris paribus
C)Decreases the value of calls,increases the value of puts ceteris paribus
D)Increases the value of calls,decreases the value of puts ceteris paribus

Question 45

The hedge ratio

A)Is the size of the long (short)position the investor must have in the underlying asset per option the investor must write (buy)to have a risk-free offsetting investment that will result in the investor perfectly hedging the option.
B)
C)Is related to the number of options that an investor can write without unlimited loss while holding a certain amount of the underlying asset.
D)all of the options

Question 46

Find the hedge ratio for a call option on £10,000 with a strike price of €12,500.The current exchange rate is €1.50/£1.00 and in the next period the exchange rate can increase to €2.40/£ or decrease to €0.9375/€1.00 . The current interest rates are i_€ = 3% and are i_£ = 4%.
Choose the answer closest to yours.

A)5/9
B)8/13
C)2/3
D)3/8
E)none of the options

Question 47

Draw the tree for a call option on $20,000 with a strike price of £10,000.The current exchange rate is £1.00 = $2.00 and in one period the dollar value of the pound will either double or be cut in half.The current interest rates are i_$ = 3% and are i_£ = 2%.

A)
B)
C)both of the options
D)none of the options

Question 48

For European options,what is the effect of an increase in the strike price E?

A)Decrease the value of calls and puts ceteris paribus
B)Increase the value of calls and puts ceteris paribus
C)Decrease the value of calls,increase the value of puts ceteris paribus
D)Increase the value of calls,decrease the value of puts ceteris paribus

Question 49

You have written a call option on £10,000 with a strike price of $20,000.The current exchange rate is $2.00/£1.00 and in the next period the exchange rate can increase to $4.00/£1.00 or decrease to $1.00/€1.00 .The current interest rates are i_$ = 3% and are i_£ = 2%.Find the hedge ratio and use it to create a position in the underlying asset that will hedge your option position.

A)Enter into a short position in a futures contract on £6,666.67
B)Lend the present value of £6,666.67 today at i_£ = 2%
C)Enter into a long position in a futures contract on £6,666.67
D)Lending the present value of £6,666.67 today at i_£ = 2% or entering into a long position in a futures contract on £6,666.67 would both work.

Question 50

For European currency options written on euro with a strike price in dollars,what is the effect of an increase in r_$?

A)Decrease the value of calls and puts ceteris paribus
B)Increase the value of calls and puts ceteris paribus
C)Decrease the value of calls,increase the value of puts ceteris paribus
D)Increase the value of calls,decrease the value of puts ceteris paribus

Question 51

Which of the following is correct?

A)Time value = intrinsic value + option premium
B)Intrinsic value = option premium + time value
C)Option premium = intrinsic value - time value
D)Option premium = intrinsic value + time value

Question 52

For European options,what is the effect of an increase in S_t?

A)Decrease the value of calls and puts ceteris paribus
B)Increase the value of calls and puts ceteris paribus
C)Decrease the value of calls,increase the value of puts ceteris paribus
D)Increase the value of calls,decrease the value of puts ceteris paribus

Question 53

Use the binomial option pricing model to find the value of a call option on £10,000 with a strike price of €12,500.The current exchange rate is €1.50/£1.00 and in the next period the exchange rate can increase to €2.40/£ or decrease to €0.9375/€1.00 .The current interest rates are i_€ = 3% and are i_£ = 4%.Choose the answer closest to yours.

A)€3,275
B)€2,500
C)€3,373
D)€3,243

Question 54

American call and put premiums

A)should be at least as large as their intrinsic value.
B)should be no larger than their intrinsic value.
C)should be exactly equal to their time value.
D)should be no larger than their speculative value.

Question 55

For European currency options written on euro with a strike price in dollars,what is the effect of an increase in the exchange rate S($/€)?

A)Decreases the value of calls and puts ceteris paribus
B)Increases the value of calls and puts ceteris paribus
C)Decreases the value of calls,increases the value of puts ceteris paribus
D)Increases the value of calls,decreases the value of puts ceteris paribus

Question 56

For European currency options written on euro with a strike price in dollars,what is the effect of an increase in r_€?

A)Decrease the value of calls and puts ceteris paribus
B)Increase the value of calls and puts ceteris paribus
C)Decrease the value of calls,increase the value of puts ceteris paribus
D)Increase the value of calls,decrease the value of puts ceteris paribus

Question 57

For European currency options written on euro with a strike price in dollars,what is the effect of an increase in r_$ relative to r_€?

A)Decrease the value of calls and puts ceteris paribus
B)Increase the value of calls and puts ceteris paribus
C)Decrease the value of calls,increase the value of puts ceteris paribus
D)Increase the value of calls,decrease the value of puts ceteris paribus

Question 58

Assume that the dollar-euro spot rate is $1.28 and the six-month forward rate is = $1.28 = $1.2864.The six-month U.S.dollar rate is 5 percent and the Eurodollar rate is 4 percent.The minimum price that a six-month American call option with a striking price of $1.25 should sell for in a rational market is

A)0 cents.
B)3.47 cents.
C)3.55 cents.
D)3 cents.

Question 59

Draw the tree for a put option on $20,000 with a strike price of £10,000.The current exchange rate is £1.00 = $2.00 and in one period the dollar value of the pound will either double or be cut in half.The current interest rates are i_$ = 3% and are i_£ = 2%.

A)
B)
C)both of the options
D)none of the options

Question 60

A binomial call option premium is calculated as

A)C₀ = [qC_uT + (1 - q)C_dT] / (1 + r_$)
B)C₀ = [qC_dT + (1 - q)C_uT] / (1 + r_$)
C)C₀ = [qC_uT + (1 - q)C_dT] / (1 - r_$)
D)C₀ = [qC_dT + (1 - q)C_uT] / (1 - r_$)

Question 61

Consider an option to buy £10,000 for €12,500.In the next period,if the pound appreciates against the dollar by 37.5 percent then the euro will appreciate against the dollar by ten percent.On the other hand,the euro could depreciate against the pound by 20 percent.
Big hint: don't round,keep exchange rates out to at least 4 decimal places.
Calculate the hedge ratio.

Question 62

The Black-Scholes option pricing formula

A)is used widely in practice,especially by international banks in trading OTC options.
B)is not widely used outside of the academic world.
C)works well enough,but is not used in the real world because no one has the time to flog their calculator for five minutes on the trading floor.
D)none of the options

Question 63

Find the Black-Scholes price of a six-month call option written on €100,000 with a strike price of $1.00 = €1.00.The current exchange rate is $1.25 = €1.00; The U.S.risk-free rate is 5 percent over the period and the euro-zone risk-free rate is 4 percent.The volatility of the underlying asset is 10.7 percent.

A)C_e = $0.63577
B)C_e = $0.0998
C)C_e = $1.6331
D)none of the options

Question 64

Find the input d₁ of the Black-Scholes price of a six-month call option written on €100,000 with a strike price of $1.00 = €1.00.The current exchange rate is $1.25 = €1.00; The U.S.risk-free rate is 5% over the period and the euro-zone risk-free rate is 4%.The volatility of the underlying asset is 10.7 percent.

A)d₁ = 0.103915
B)d₁ = 2.9871
C)d₁ = 0.0283
D)none of the options

Question 65

Consider an option to buy £10,000 for €12,500.In the next period,if the pound appreciates against the dollar by 37.5 percent then the euro will appreciate against the dollar by ten percent.On the other hand,the euro could depreciate against the pound by 20 percent.
Big hint: don't round,keep exchange rates out to at least 4 decimal places.
USING RISK NEUTRAL VALUATION (i.e.,the binomial option pricing model)find the value of the call (in euro).

Question 66

With regard to trading costs,

A)forward contracts involve the bid-ask spread plus the broker's commission.
B)futures contracts involve the bid-ask spread plus the broker's commission.
C)futures contracts involve the bid-ask spread plus indirect bank charges via compensating balance requirements.
D)none of the options

Question 67

Consider an option to buy £10,000 for €12,500.In the next period,if the pound appreciates against the dollar by 37.5 percent then the euro will appreciate against the dollar by ten percent.On the other hand,the euro could depreciate against the pound by 20 percent.
Big hint: don't round,keep exchange rates out to at least 4 decimal places.
State the composition of the replicating portfolio; your answer should contain "trading orders" of what to buy and what to sell at time zero.

Question 68

Empirical tests of the Black-Scholes option pricing formula

A)have faced difficulties due to nonsynchronous data.
B)suggest that when using simultaneous price data and incorporating transaction costs they conclude that the PHLX American currency options are efficiently priced.
C)suggest that the European option-pricing model works well for pricing American currency options that are at- or out-of-the money,but does not do well in pricing in-the-money calls and puts.
D)all of the options

Question 69

Find the dollar value today of a 1-period at-the-money call option on €10,000.The spot exchange rate is €1.00 = $1.25.In the next period,the euro can increase in dollar value to $2.00 or fall to $1.00.The interest rate in dollars is i_$ = 27.50%; the interest rate in euro is .

A)$3,308.82
B)$0
C)$3,294.12
D)$4,218.75

Question 70

Suppose that you have written a call option on €10,000 with a strike price in dollars.Suppose further that the hedge ratio is ¹/₂.Which of the following would be an appropriate hedge for a short position in this call option?

A)Buy €5,000 today at today's spot exchange rate.
B)Agree to buy €5,000 at the maturity of the option at the forward exchange rate for the maturity of the option that prevails today .
C)Buy the present value of €5,000 discounted at i€ for the maturity of the option.
D)Agree to buy €5,000 at the maturity of the option at the forward exchange rate for the maturity of the option that prevails today or buy the present value of €5,000 discounted at i€ for the maturity of the option.

Question 71

Empirical tests of the Black-Scholes option pricing formula

A)shows that binomial option pricing is used widely in practice,especially by international banks in trading OTC options.
B)works well for pricing American currency options that are at-the-money or out-of-the-money.
C)does not do well in pricing in-the-money calls and puts.
D)works well for pricing American currency options that are at-the-money or out-of-the-money,but does not do well in pricing in-the-money calls and puts.

Question 72

Which of the following is correct?

A)The value (in dollars)of a call option on £5,000 with a strike price of $10,000 is equal to the value (in dollars)of a put option on $10,000 with a strike price of £5,000 only when the spot exchange rate is $2 = £1.
B)The value (in dollars)of a call option on £5,000 with a strike price of $10,000 is equal to the value (in dollars)of a put option on $10,000 with a strike price of £5,000.

Question 73

With regard to contractual size,

A)forward contracts are characterized by a standardized amount of the underlying asset.
B)futures contracts are tailor-made to the needs of the participant.
C)futures contracts are characterized by a standardized amount of the underlying asset.
D)none of the options

Question 74

The one-step binomial model assumes that at the end of the option period,the call will have appreciated to S_uT = S₀u or depreciated to S_dT = S₀d.How is u calculated?

A)1/d
B)e^(σt^0.5)
C)both 1/d and e^(σt^0.5)
D)none of these options

Question 75

Consider an option to buy £10,000 for €12,500.In the next period,if the pound appreciates against the dollar by 37.5 percent then the euro will appreciate against the dollar by ten percent.On the other hand,the euro could depreciate against the pound by 20 percent.
Big hint: don't round,keep exchange rates out to at least 4 decimal places.
Calculate the current €/£ spot exchange rate.

Question 76

Use the European option pricing formula to find the value of a six-month call option on Japanese yen.The strike price is $1 = ¥100.The volatility is 25 percent per annum; r_$ = 5.5% and r_¥ = 6%.

A)0.005395
B)0.005982
C)$0.006137/¥
D)none of the options

Question 77

With regard to trading location,

A)forward contracts are traded competitively on organized exchanges.
B)futures contracts are traded competitively on organized exchanges.
C)futures contracts are traded by bank dealers via a network of telephones and computerized dealing systems.
D)none of the options

Question 78

Consider an option to buy £10,000 for €12,500.In the next period,if the pound appreciates against the dollar by 37.5 percent then the euro will appreciate against the dollar by ten percent.On the other hand,the euro could depreciate against the pound by 20 percent.
Big hint: don't round,keep exchange rates out to at least 4 decimal places.
Find the risk neutral probability of an "up" move.

Question 79

Find the input d₁ of the Black-Scholes price of a six-month call option on Japanese yen.The strike price is $1 = ¥100.The volatility is 25 percent per annum; r_$ = 5.5% and r_¥ = 6%.

A)d₁ = 0.074246
B)d₁ = 0.005982
C)d₁ = $0.006137/¥
D)none of the options

Question 80

With regard to expiration date,

A)futures contracts do not have delivery dates.
B)forward contracts have standardized delivery dates.
C)futures contracts have tailor-made delivery dates that meet the needs of the investor.
D)futures contracts have standardized delivery dates.