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.

Accepted Answer

In option contracts, only the buyer has the right, but not the obligation, to execute the contract, while the seller must fulfill the contract if the buyer decides to execute. In futures contracts, both parties are obligated to fulfill the terms of the contract at the specified date.

Question 2

American options are exercisable any time until expiration.

Accepted Answer

American options differ from European options in that they can be exercised at any time until their expiration date. European options, on the other hand, can only be exercised at their expiration date.

Question 3

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

Accepted Answer

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

Question 4

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

Accepted Answer

A currency call option gives the holder the right, but not the obligation, to buy a currency at a predetermined exchange rate (the exercise price) on or before the expiration date of the option. If the exercise price is lower than the underlying exchange rate, it is profitable for the holder to exercise the option and buy the currency at a lower rate, hence the option is in-the-money.

Question 5

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

Accepted Answer

The number of contracts bought must equal the number sold.

Question 6

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

Accepted Answer

Volatilities on spot and forward currencies are similar.

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.

Accepted Answer

Selling a put option means you are giving someone else the right to sell the underlying asset (in this case, euros) to you at a predetermined price (the strike price) within a specific time frame. If the buyer decides to exercise this right, you are obligated to buy the euros at the strike price, even if the market price is now lower.

Question 8

European options are exercisable any time until expiration.

Accepted Answer

They can be exercised only at expiration.

Question 9

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

Accepted Answer

They are often customized to fit the needs of a particular client.

Question 10

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

Accepted Answer

This is true according to the principle of reciprocity in options trading. If someone has the option to buy pounds at a certain price, it is equivalent to someone else having the option to sell dollars at the same price. The exchange rate quoted in pounds per dollar can be calculated by taking the reciprocal of the exchange rate quoted in dollars per pound.

Question 11

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

Accepted Answer

A currency put option allows the holder to sell a currency at a specified exchange rate. Therefore, if the exercise price (the rate at which the holder can sell the currency) is greater than the current market exchange rate, the option is in-the-money, as it would be profitable to exercise the option.

Question 12

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

Accepted Answer

It is the right to buy.

Question 13

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

Accepted Answer

Spot and futures price volatilities are similar.

Question 14

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

Accepted Answer

Large commercial and investment banks operate an active over-the-counter market in currency options, allowing investors to trade currency options without the need for a centralized exchange.

Question 15

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

Accepted Answer

Both spot and futures currency options can be used to hedge currency risk, and their effectiveness in achieving this purpose is generally considered equivalent.

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.

Accepted Answer

This is correct. A currency call option gives the holder the right to buy one currency with another currency at the specified exercise price.

Question 17

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

Accepted Answer

Over-the-counter options are also traded through commercial and investment banks.

Question 18

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

Accepted Answer

A currency put option gives the holder the right to sell the underlying currency at a predetermined price within a specified time period.

Question 19

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

Accepted Answer

The option writer has an obligation to sell pounds and to buy dollars.

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.

Accepted Answer

The writer has the obligation to buy from the put option holder.

Quiz 6: Currency Options and Options Markets

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.

American options are exercisable any time until expiration.

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

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

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

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

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

European options are exercisable any time until expiration.

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

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

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

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

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

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

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

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

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

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

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

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

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