Question 1

An option writer is the seller of a call or a put option.

Accepted Answer

An option writer is indeed the seller of a call or a put option.

Question 2

The forward premium is the price specified in a call or put option.

Accepted Answer

The forward premium is not related to options. It refers to the difference between the spot exchange rate and the forward exchange rate for a currency.

Question 3

It is possible to have an opportunity loss when using futures to hedge.

Accepted Answer

Opportunity loss can occur when the price of the underlying asset being hedged increases and the futures contract is sold at a lower price than the current market price, resulting in a missed chance to make a profit.

Question 4

Margin is used in the forward market to mitigate default risk.

Accepted Answer

The answer of Margin is used in the forward market...

Question 5

A European option can only be exercised at the expiration date, while an American option can be exercised any time prior to the expiration date.

Accepted Answer

European options can only be exercised at expiration, whereas American options can be exercised at any time before the expiration date.

Question 6

If the futures rate is above the forward rate, actions by rational investors would put upward pressure on the forward rate and downward pressure on the futures rate.

Accepted Answer

If the futures rate is above the forward rate, investors would prefer the forward rate as it is cheaper, and therefore, demand for the forward rate would increase, putting upward pressure on the forward rate. At the same time, demand for the futures contract would decrease, putting downward pressure on the futures rate. This process would continue until the forward and futures rates are in equilibrium.

Question 7

The highest amount a buyer of a call or a put option can lose is the exercise price.

Accepted Answer

This statement is false. The highest amount a buyer of a call or a put option can lose is the premium paid for the option. The exercise price only comes into play if the option is exercised.

Question 8

Futures contracts are standardized with respect to delivery date and the futures price specified for the settlement date.

Accepted Answer

Futures contracts are standardized with respect to the quantity and quality of the commodity or asset, not the futures price. The delivery date is standardized, but the futures price is determined by market forces.

Question 9

The currency futures markets are regulated by the International Monetary Fund.

Accepted Answer

The currency futures markets are regulated by the Commodity Futures Trading Commission (CFTC) in the United States and by similar regulatory agencies in other countries. The International Monetary Fund (IMF) is an international organization that promotes international monetary cooperation and exchange rate stability, but it does not regulate market activity.

Question 10

If an investor who has previously purchased a futures contract wishes to liquidate her position, she would sell an identical futures contract with the same settlement date.

Accepted Answer

This is correct. To liquidate a futures contract, an investor would need to enter into an offsetting or opposite trade, meaning they would sell the same type of contract they originally bought. This would cancel out their original position, allowing them to exit the market.

Question 11

Hedgers should buy puts if they are hedging an expected inflow of foreign currency.

Accepted Answer

The answer of Hedgers should buy puts if they are...

Question 12

Margin requirements require investors in futures contracts to make deposits with their respective brokerage firms when they take their position. The deposits are intended to minimize the credit risk associated with futures contracts.

Accepted Answer

Margin requirements are indeed put in place to minimize credit risk for both the investor and the brokerage firm.

Question 13

The forward premium is the price specified in a call or put option.

Accepted Answer

The forward premium is the difference between the spot rate and the forward rate for a currency. It is not directly related to options.

Question 14

Futures and options are available for cross rates.

Accepted Answer

Futures and options are available for many cross rates such as EUR/JPY, GBP/JPY, AUD/USD, etc.

Question 15

Forward contracts are the best technique for managing exposure arising from project bidding.

Accepted Answer

Forward contracts, while useful for hedging against currency risk, may not always be the best technique for managing exposure arising from project bidding due to their inflexibility and the potential for mismatch between the contract terms and the actual exposure. Other techniques, such as options or a combination of financial instruments, might offer better risk management depending on the specific circumstances.

Question 16

The writer of an currency call option is obligated to buy the currency if the option is exercised.

Accepted Answer

The writer of a currency call option is obligated to sell (not buy) the currency if the option is exercised.

Question 17

A currency put option is a contract specifying a standard volume of a particular currency to be exchanged on a specific settlement date.

Accepted Answer

A currency put option gives the holder the right, but not the obligation, to sell a specified amount of a currency at a predetermined price to the option seller, on or before a specified date. It does not specify an exchange on a specific settlement date but rather provides the option to do so.

Question 18

There are no transactions costs associated with trading futures or options.

Accepted Answer

There are transaction costs associated with trading futures or options, such as commissions, exchange fees, and possibly bid-ask spreads.

Question 19

A straddle is a speculative strategy that involves the purchase of both a call and a put.

Accepted Answer

A straddle involves buying both a call and a put option with the same strike price and expiration date in order to profit from significant price movements in either direction.

Question 20

Options can be traded on an exchange or over the counter

Accepted Answer

Options can be traded on organized exchanges (such as the Chicago Board Options Exchange) or they can be traded over-the-counter (OTC) with a customized agreement between two parties.

Quiz 5: Currency Derivatives

An option writer is the seller of a call or a put option.

The forward premium is the price specified in a call or put option.

It is possible to have an opportunity loss when using futures to hedge.

Margin is used in the forward market to mitigate default risk.

A European option can only be exercised at the expiration date, while an American option can be exercised any time prior to the expiration date.

If the futures rate is above the forward rate, actions by rational investors would put upward pressure on the forward rate and downward pressure on the futures rate.

The highest amount a buyer of a call or a put option can lose is the exercise price.

Futures contracts are standardized with respect to delivery date and the futures price specified for the settlement date.

The currency futures markets are regulated by the International Monetary Fund.

If an investor who has previously purchased a futures contract wishes to liquidate her position, she would sell an identical futures contract with the same settlement date.

Hedgers should buy puts if they are hedging an expected inflow of foreign currency.

Margin requirements require investors in futures contracts to make deposits with their respective brokerage firms when they take their position. The deposits are intended to minimize the credit risk associated with futures contracts.

The forward premium is the price specified in a call or put option.

Futures and options are available for cross rates.

Forward contracts are the best technique for managing exposure arising from project bidding.

The writer of an currency call option is obligated to buy the currency if the option is exercised.

A currency put option is a contract specifying a standard volume of a particular currency to be exchanged on a specific settlement date.

There are no transactions costs associated with trading futures or options.

A straddle is a speculative strategy that involves the purchase of both a call and a put.

Options can be traded on an exchange or over the counter