Question 1

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

Accepted Answer

As an option moves further out-of-the-money, the probability of the option finishing in-the-money decreases, resulting in a decrease in delta. As a result, delta moves toward 0.

Question 2

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 3

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

An intrinsic value of a call option is calculated as the current spot price minus the exercise price, but it cannot be negative; if the result is negative, the intrinsic value is considered to be $0.00. Since the spot price ($1.45/£) is less than the exercise price ($1.50/£), the call option is out of the money and its intrinsic value is $0.00.

Question 4

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 for the writer (seller) of a put option. The maximum loss is limited to the strike price of the underlying asset less the premium, and the gain or loss is equal to but of the opposite sign of the buyer of a put option. The maximum gain is the amount of the premium received from the buyer. Therefore, statement D is incorrect as all of the statements are true.

Question 5

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

A) The buyer of a put option pays a premium to the writer of the option for the right to sell the underlying asset at a specific price. The maximum loss for the buyer is limited to the amount paid for the premium.
B) When the buyer of a put option exercises their rights, the writer of the option is obligated to purchase the underlying asset at the specified price. The gain for the buyer is equal to but opposite in sign to the writer of the option.
C) The buyer of a put option has the potential to earn a profit if the price of the underlying asset decreases below the strike price. The maximum gain potential for the buyer is limited to the difference between the strike price and the premium paid for the option.

Question 6

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 true as per the standard definitions used in options trading.

Question 7

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 is the sum of two components: the intrinsic value (the difference between the underlying asset's current price and the strike price) and the time value (the amount the option is "worth" in terms of the potential for future price movements). Therefore, the correct choice is C, which states that the intrinsic value plus the time value are the components that make up the value of a European style call option.

Question 8

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 9

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 factors listed (present spot rate, time to maturity, and standard deviation of daily spot price movement) are taken into consideration when determining the premium price of a currency option. None of the options are excluded.

Question 10

The time value is asymmetric in value as you move away from the strike price (i.e., the time value at two cents above the strike price is not necessarily the same as the time value two cents below the strike price).

Accepted Answer

The answer of The time value is asymmetric in value...

Question 11

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

Using the delta, we can calculate the new option premium as follows: 
Delta * (Spot rate change) + original premium 
0.5 * ($1.71/£ - $1.70/£) + $0.033/£ = $0.038/£

Question 12

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

Accepted Answer

Delta measures the change in the option price for every $1 change in the underlying asset price. As the option moves further in-the-money, the probability of the option finishing in-the-money at expiration increases, which causes the delta to move toward 1.

Question 13

Define and explain the logic for the time value of an option. Explain the value of the time value of an option for deep out-of-the money and deep in-the-money options.

Accepted Answer

The answer of Define and explain the logic for the...

Question 14

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

Accepted Answer

Most option profits and losses are realized through offsetting contracts rather than taking actual delivery of the currency. This means that the option holder can sell the option back into the market at a profit or loss before the option's expiration date without having to actually take delivery of the underlying currency. Only a small percentage of options contracts result in actual delivery of the currency.

Question 15

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 value:
New lambda = Lambda + (Volatility Increase)/2 = 0.4 + (1/2)*(1/100) = 0.405
Then, we can calculate the new option premium:
New premium = Initial premium * e^(New lambda * Volatility Increase) = 0.033 * e^(0.405 * 1/100) = 0.037/£.

Therefore, the best choice is B, $0.037/£, since it is the calculated new option premium.

Question 16

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 is the best choice as the trader who believes volatility will fall significantly wants to benefit from a decrease in options prices. Selling options now, while the volatility is still high, will allow the trader to obtain a higher premium for the options sold. Buying futures or options now would be costly and not in line with the trader's belief that volatility will decrease.

Question 17

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

Accepted Answer

Foreign currency options can be traded both over-the-counter and on organized exchanges such as the Chicago Mercantile Exchange (CME) and the Philadelphia Stock Exchange (PHLX).

Question 18

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

Accepted Answer

All the other options (historic, forward-looking, implied) are common ways to view volatility, but spot is not a typical way to view it.

Question 19

The price of an option is always somewhat greater than its intrinsic value, since there is always some chance that the intrinsic value will rise between the present and the expiration date.

Accepted Answer

The statement is correct. The price of an option consists of its intrinsic value (if it has any) plus its time value, which reflects the probability that the underlying asset's price will move in a favorable direction before the option expires. Therefore, the price of an option will be higher than its intrinsic value alone in most cases, since there is always some chance that the asset's price will change in the future.

Question 20

Option premiums deteriorate at a/an ________ 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 the expiration date gets closer, especially for out-of-the-money options.

Quiz 7: Foreign Currency Derivatives: Futures and Options

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

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

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

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

The buyer (long) of a put option:

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

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

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

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

The time value is asymmetric in value as you move away from the strike price (i.e., the time value at two cents above the strike price is not necessarily the same as the time value two cents below the strike price).

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:

As an option moves further in-the-money, delta moves toward ________.

Define and explain the logic for the time value of an option. Explain the value of the time value of an option for deep out-of-the money and deep in-the-money options.

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:

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

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

Volatility is viewed the following ways EXCEPT:

The price of an option is always somewhat greater than its intrinsic value, since there is always some chance that the intrinsic value will rise between the present and the expiration date.

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