Question 1

The writer of the option is referred to as the seller,and the buyer of the option is referred to as the holder.

Accepted Answer

This is correct terminology used in options trading.

Question 2

Assume that a call option has an exercise price of $1.50/£.At a spot price of $1.45/£,the call option has:
A)a time value of $0.04.
B)a time value of $0.00.
C)an intrinsic value of $0.00.
D)an intrinsic value of -$0.04.

Accepted Answer

The intrinsic value of the option is the difference between the exercise price and the spot price. In this case, the spot price is $1.45/£, which is lower than the exercise price of $1.50/£, so the intrinsic value is $0.00. The time value is the option premium minus the intrinsic value, so in this case, since the intrinsic value is zero, the time value is also zero.

Question 3

For a $1.50/£ call option with an initial premium of $0.033/£ and a rho value of 0.2,after an increase in the U.S.dollar rate from 8% to 9% - the new ATM option premium would be:
A)$0.037/£.
B)$1.55/£.
C)$0.036/£.
D)$0.035/£.

Accepted Answer

The answer of For a $1.50/£ call option with an...

Question 4

Volatility is viewed the following ways EXCEPT:
A)historic
B)forward-looking
C)implied
D)spot

Accepted Answer

All the other choices (historic, forward-looking, and implied) are ways of viewing volatility, but "spot" is not a valid way of viewing volatility. "Spot" typically refers to the current market price of an asset, not the level of volatility in the market.

Question 5

Which of the following is NOT a factor in determining the premium price of a currency option?
A)the present spot rate
B)the time to maturity
C)the standard deviation of the daily spot price movement
D)All of the above are factors in determining the premium price.

Accepted Answer

All of the options listed (the present spot rate, the time to maturity, and the standard deviation of the daily spot price movement) are indeed factors that influence the premium price of a currency option.

Question 6

As an option moves further in-the-money delta moves toward:
A)0.
B)-1.
C)1.
D)large numbers.

Accepted Answer

Delta is the measure of the option's sensitivity to changes in the underlying asset price. As an option moves further in-the-money, the probability of the option ending up in-the-money at expiration increases, and therefore, the delta moves closer to 1.

Question 7

For a $1.50/£ call option with an initial premium of $0.033/£ and a phi value of -0.2,after an increase in the foreign interest (the pound sterling rate)rate from 8% to 9% - the new option premium would be:
A)$0.035/£.
B)$1.48/£.
C)$0.031/£.
D)$0.032/£.

Accepted Answer

First, we need to calculate the new phi value:
phi = -e^(-rF*T)*N(-d2)/F*sqrt(T)
where:
rF = foreign interest rate = 0.09
T = time to expiration = 1 year
N = cumulative normal distribution function
d2 = (ln(F/K) + (rF - rD + sigma^2/2)*T) / (sigma*sqrt(T))
F = current spot rate = 1.5
K = strike price = 1.5
sigma = volatility = 0.2

d2 = (ln(1.5/1.5) + (0.09 - 0 + 0.2^2/2)*1) / (0.2*sqrt(1)) = 0.35
N(-d2) = 0.36317
phi = -e^(-0.09*1)*0.36317/1.5*sqrt(1) = -0.1065

Next, we can use the following formula to calculate the new option premium:
New option premium = old option premium + phi * delta premium
where:
delta premium = -0.033/1.5 = -0.022

New option premium = 0.033/1.5 - 0.1065 * (-0.022) = 0.031/£

Therefore, the best choice is C, with a new option premium of $0.031/£.

Question 8

The Delta of an option is defined as:
A)expected change in the option premium for a small change in time to expiration.
B)expected change in the option premium for a small change in volatility.
C)expected change in the option premium for a small change in the spot rate.
D)expected change in the option premium for a small change in the domestic interest rate.

Accepted Answer

Delta is the expected change in the option premium for a small change in the spot rate. This is because the value of the option is directly tied to the underlying asset's price, which is represented by the spot rate. Option traders often use delta to measure the sensitivity of an option's price to changes in the price of the underlying asset.

Question 9

Which of the following is NOT true for the writer of a put option?
A)The maximum loss is limited to the strike price of the underlying asset less the premium.
B)The gain or loss is equal to but of the opposite sign of the buyer of a put option.
C)The maximum gain is the amount of the premium.
D)All of the above are true.

Accepted Answer

All of the statements are true, therefore none of them are false.

Question 10

The ________ of an option is the value if the option were to be exercised immediately.It is the option's ________ value.
A)intrinsic value;maximum
B)intrinsic value;minimum
C)time value;maximum
D)time value;minimum

Accepted Answer

The intrinsic value of an option is the value it would have if it were exercised immediately, representing the minimum value of the option, not considering the time value or potential for future price changes.

Question 11

Foreign currency options are available both over-the-counter and on organized exchanges.

Accepted Answer

Foreign currency options can be traded over-the-counter between two parties, as well as on organized exchanges such as the Chicago Mercantile Exchange (CME) and the International Securities Exchange (ISE).

Question 12

The value of a European style call option is the sum of two components:
A)the present value plus the intrinsic value.
B)the time value plus the present value.
C)the intrinsic value plus the time value.
D)the intrinsic value plus the standard deviation.

Accepted Answer

The value of a European style call option consists of two components: intrinsic value and time value. Intrinsic value is the difference between the underlying asset's current price and the strike price of the option. Time value represents the option's potential for further appreciation, which is related to factors such as the time remaining until expiration and the volatility of the underlying asset. Therefore, the best choice is C, which says that the value of a European style call option is the sum of the intrinsic value plus the time value.

Question 13

Traders who believe volatilities will fall significantly in the near-term will:
A)sell futures now.
B)buy options now.
C)sell options now.
D)buy futures now.

Accepted Answer

Selling options would be the best choice in this scenario as a decrease in volatility would lead to a decrease in option premiums, allowing the trader to buy back the options at a lower price for a profit. Selling futures (choice A) or buying futures (choice D) and buying options (choice B) would not be the best choices as they would not provide the same profit potential in a decreasing volatility environment.

Question 14

Compare and contrast foreign currency options and futures.Identify situations when you may prefer one vs.the other when speculating on foreign exchange.

Accepted Answer

The answer of Compare and contrast foreign currency options and...

Question 15

As an option moves further out-of-the-money,delta moves toward:
A)1..
B)0.
C)-1.
D)large negative numbers.

Accepted Answer

Delta measures the change in an option's price in relation to the change in the underlying asset's price. As an option moves further out-of-the-money, the probability of it expiring in-the-money decreases and therefore the delta decreases towards 0. Therefore, option B is the correct answer choice.

Question 16

Option premiums deteriorate at an/a ________ as they approach expiration.
A)increasing rate
B)proportional
C)decreasing rate
D)less than proportional rate

Accepted Answer

Option premiums deteriorate at an increasing rate as they approach expiration, a phenomenon known as "time decay" or "theta." This is because the probability of the option finishing in the money decreases as time runs out, leading to a rapid loss in extrinsic value.

Question 17

Most option profits and losses are realized through taking actual delivery of the currency rather than offsetting contracts.

Accepted Answer

Most option traders seldom take actual delivery of the currency but instead offset their positions before expiration. This allows them to realize profits or limit losses without having to take physical delivery of the underlying currency.

Question 18

For a $1.50/£ call option with an initial premium of $0.033/£ and a lambda of 0.4,after an increase in annual volatility of 1 percent point - for example from 10% to 11% - the new option premium would be:
A)$0.036/£.
B)$0.037/£.
C)$0.004/£.
D)$1.54/£.

Accepted Answer

First, we need to calculate the new lambda with the increased volatility. Using the formula:

lambda_new = lambda_old + 0.5*(v_new^2 - v_old^2)/100

where:
lambda_old = 0.4
v_old = 10%
v_new = 11%

lambda_new = 0.4 + 0.5*(11%^2 - 10%^2)/100
lambda_new = 0.4155

Next, we can calculate the new option premium using the formula:

premium_new = premium_old * (lambda_new/lambda_old)

premium_new = 0.033/£ * (0.4155/0.4)
premium_new = 0.037/£

Therefore, the new option premium would be $0.037/£, which is answer choice B.

Question 19

The buyer (long)of a put 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 maximum gain potential limited to the difference between the strike price and the premium paid.
D)all of the above

Accepted Answer

The buyer of a put option has a maximum loss limited to the premium paid for the option (A), their gain is indeed equal to but opposite in sign to the writer's gain or loss (B), and their maximum gain is limited to the strike price minus the premium paid, assuming the underlying asset's price goes to zero (C).

Question 20

If the spot rate changes from $1.70/£ to $1.71/£ and there is an option with an initial premium of $0.033/£ and a delta of 0.5,then the new option premium would be:
A)$0.043/£.
B)$0.038/£.
C)$0.005/£.
D)$1.715/£.

Accepted Answer

Delta measures the sensitivity of an option price to changes in the underlying asset price. A delta of 0.5 means that for every $1 change in the spot rate, the option price will change by $0.50.

Using this information, we can calculate the new option premium as follows:

New option premium = Initial premium + (Delta x Change in spot rate)

New option premium = $0.033/£ + (0.5 x ($1.71/£ - $1.70/£))

New option premium = $0.033/£ + (0.5 x $0.01/£)

New option premium = $0.038/£

Therefore, the new option premium is $0.038/£, so the correct answer is B.

Quiz 7: Foreign Currency Derivatives: Futures and Options

The writer of the option is referred to as the seller,and the buyer of the option is referred to as the holder.

Assume that a call option has an exercise price of $1.50/£.At a spot price of $1.45/£,the call option has:

For a $1.50/£ call option with an initial premium of $0.033/£ and a rho value of 0.2,after an increase in the U.S.dollar rate from 8% to 9% - the new ATM option premium would be:

Volatility is viewed the following ways EXCEPT:

Which of the following is NOT a factor in determining the premium price of a currency option?

As an option moves further in-the-money delta moves toward:

For a $1.50/£ call option with an initial premium of $0.033/£ and a phi value of -0.2,after an increase in the foreign interest (the pound sterling rate) rate from 8% to 9% - the new option premium would be:

The Delta of an option is defined as:

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

The of an option is the value if the option were to be exercised immediately.It is the option's value.

Foreign currency options are available both over-the-counter and on organized exchanges.

The value of a European style call option is the sum of two components:

Traders who believe volatilities will fall significantly in the near-term will:

Compare and contrast foreign currency options and futures.Identify situations when you may prefer one vs.the other when speculating on foreign exchange.

As an option moves further out-of-the-money,delta moves toward:

Option premiums deteriorate at an/a ________ as they approach expiration.

Most option profits and losses are realized through taking actual delivery of the currency rather than offsetting contracts.

For a $1.50/£ call option with an initial premium of $0.033/£ and a lambda of 0.4,after an increase in annual volatility of 1 percent point - for example from 10% to 11% - the new option premium would be:

The buyer (long) of a put option:

If the spot rate changes from $1.70/£ to $1.71/£ and there is an option with an initial premium of $0.033/£ and a delta of 0.5,then the new option premium would be: