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 May call option on pounds with a strike price of 1440 means:

Accepted Answer

The correct interpretation of a call option with a strike price of 1440 is $0.0088/£, as options on currencies are typically quoted in terms of the currency per unit, and in this case, it implies $0.0088 per British pound.

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

The break-even price for a call option is the strike price plus the cost of the option. Therefore, the break-even price for the given option is 2.05 + 0.02 = 2.07. Hence, the correct choice is B.

Question 3

A call option whose exercise price exceeds 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, while it is said to be at-the-money when the exercise price is equal to the spot price. Therefore, a call option whose exercise price exceeds the spot price is out-of-the-money. Option D is not a valid term in options trading.

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

Table 7.1 only provides information on British pound option prices, not the actual closing price of the currency.

Question 5

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 6

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

Accepted Answer

A call option is considered in-the-money when the exercise price is lower than the current market price of the underlying asset. This means that the owner of the call option has the right to buy the asset at a lower price than its current value, which is advantageous.

Question 7

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

Accepted Answer

The purchaser of a call option contract has the right to buy the underlying asset at a fixed price (strike price) and can profit if the asset's value rises. The maximum gain is unlimited as the asset's price can rise significantly, giving the option holder a large profit. However, the maximum loss for the option holder is limited to the premium paid for the option contract. This is because the option holder can choose not to exercise the option if the asset's price falls, thus losing only the premium paid.

Question 8

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. Additionally, a call option gives the holder the right to buy an underlying asset (in this case, foreign currency), while a put option gives the holder the right to sell an underlying asset (such as an option). Therefore, option A is the correct answer.

Question 9

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 all three options mentioned in the question: expiration dates tailored to the needs of the client, amounts that are tailor made, and client desired expiration dates. This provides greater flexibility and customization for clients compared to exchange-traded options.

Question 10

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. Unlimited loss or gain applies to the buyer of a call option, not the seller/writer.

Question 11

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

If Dash believes that the dollar will rise sharply against the pound in the coming months, he should buy a put option on the pound. A put option gives the buyer the right to sell the underlying currency (pound in this case) at a specified price (strike price) on or before a specified date (expiration date). If the pound declines in value against the dollar, the put option will increase in value, allowing Dash to sell it for a profit. On the other hand, if Dash were to sell a call on the pound, it would require him to deliver the pound at a fixed price, which would result in a loss if the pound declined in value.

Question 12

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

A put option gives the holder the right to sell the underlying asset at the strike price. The profit is maximized when the spot price is lower than the strike price. Therefore, the lower the spot price, the higher the profit. Hence, ¥115/$ maximizes the profit.

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 typically use exchange markets for foreign currency option contracts as they have larger transaction sizes and require liquidity. Individuals and financial institutions typically use over-the-counter options as they have smaller transaction sizes and can be tailored to individual needs.

Question 14

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 exercise date.

Question 15

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 exchange rate for a currency pair, and commission is the fee charged by a broker for executing a trade.

Question 16

The buyer of a long call option:

Accepted Answer

The buyer of a long call option indeed has a maximum loss limited to the premium paid for the option (A), stands to gain or lose in a manner that is opposite to the writer of the call option (B), and has an unlimited maximum gain potential as the price of the underlying asset can theoretically rise indefinitely (C). Therefore, all of the given statements are correct.

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 profit from exercising a call option increases as the spot price of the underlying asset (in this case, euros) increases above the strike price. Since the strike price is $1.30/euro, a spot price of $1.35/euro maximizes your profit by providing the highest difference above the strike price.

Question 18

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

To protect against unexpected changes in the dollar/pound exchange rate, the best choice would be to buy a pound call option. This would give the firm the right, but not the obligation, to purchase pounds at a fixed exchange rate if the exchange rate were to become unfavorable. Selling a put option would obligate the firm to purchase pounds at a fixed exchange rate if the exchange rate were to become unfavorable, which would not be desirable. Buying a put option or selling a call option would not provide adequate protection for the accounts payable denominated in pounds.

Question 19

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 20

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

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 May call option on pounds with a strike price of 1440 means:

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?

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.

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

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

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