Question 1

The main advantage(s) of over-the-counter foreign currency options over exchange traded options is(are)
A) expiration dates tailored to the needs of the client.
B) amounts that are tailor made.
C) client desired expiration dates.
D) all of the above.

Accepted Answer

Over-the-counter foreign currency options offer all of the advantages mentioned, including expiration dates tailored to the needs of the client, amounts that are tailored to the client's desired amount, and client-desired expiration dates. These options are customized to meet the specific needs of the client and offer more flexibility than exchange-traded options, which have standardized terms and conditions.

Question 2

The most widely used reference rate for standardized quotations, loan agreements, or financial derivative valuations is the
A) Federal Reserve Discount rate.
B) federal funds rate.
C) LIBOR.
D) one-year U.S. Treasury Bill.

Accepted Answer

LIBOR (London Interbank Offered Rate) is the most widely used reference rate for standardized quotations, loan agreements, or financial derivative valuations. It is an average interest rate based on the rates at which banks lend money to one another in the London interbank market. LIBOR is used as a benchmark for many financial instruments and is published daily in several currencies and maturities. The Federal Reserve Discount rate, federal funds rate, and one-year U.S. Treasury Bill are all important rates in the financial market, but they are not as widely used as LIBOR as a reference rate for standardized financial contracts.

Question 3

The ________ of an option is the value if the option were to be exercised immediately. It is the options ________ 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 4

Assume that a call option has an exercise price of $1.50/³. At a spot price of $1.45/³, 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 5

TABLE 7.1
Use the below mentioned table to answer the following question(s).
April 19, 2010, 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 ________.
A) 1460; 0.68 cents; $425.00
B) 1440; 1.06 cents; $662.50
C) 1450; 1.02 cents; $637.50
D) 1440; 1.42 cents; $887.50

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

Question 6

What is the reason for an investor to pay for a zero intrinsic value option?
A) there is always a chance that the spot rate will move before expiration putting the option in the money
B) there is always a chance that the strike price for options with different maturities will increase
C) investors are typically not investing in zero intrinsic value options
D) the premiums for zero intrinsic value options are very small

Accepted Answer

Even though a zero intrinsic value option may not be immediately profitable, there is always a chance that the spot rate will move before expiration putting the option in the money. Therefore, an investor may be willing to pay for the option in the hopes of a potential payoff in the future.

Question 7

TABLE 7.1
Use the below mentioned table to answer the following question(s).
April 19, 2010, 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) $88/£ per contract.
B) $0.88/£.
C) $0.0088/£.
D) none of the above

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 8

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 ________.
A) exchange markets; over-the-counter
B) over-the-counter; exchange markets
C) private; government sponsored
D) government sponsored; private

Accepted Answer

Businesses usually use exchange markets for foreign currency option contracts because they require large volumes of currencies and need access to a wide range of market participants. On the other hand, individuals and financial institutions typically use over-the-counter options as they have smaller volumes and require more customized contracts.

Question 9

TABLE 7.1
Use the below mentioned table to answer the following question(s).
April 19, 2010, 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, 2010?
A) $1.448/£
B) £1.448/$
C) $14.48/£
D) None of the above

Accepted Answer

The closing price of the British pound on April 18, 2010, was $1.448/£, as indicated by choice A.

Question 10

The maximum profit that a writer of a call can make is
A) unlimited if the option is in the money.
B) unlimited if the option is out of the money.
C) limited to the received premium.
D) none of the above

Accepted Answer

The maximum profit for a call writer is limited to the premium received, as they have an obligation to sell the underlying asset at the strike price if the option is exercised.

Question 11

Other things equal, the price of an option goes up as the volatility of the option decreases.

Accepted Answer

The statement is incorrect. Other things equal, the price of an option goes up as the volatility of the option increases, not decreases. This is because higher volatility increases the likelihood of the option ending up in the money, and therefore increases its value.

Question 12

Which of the following is NOT a factor in determining the 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 the daily spot price movement) are important in determining the price of a currency option. Therefore, D is not the correct answer.

Question 13

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 (OTC) and on organized exchanges such as the Chicago Mercantile Exchange (CME) and the Intercontinental Exchange (ICE).

Question 14

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 15

Company's treasurer decides to go long on a currency put option to
A) gain potential unlimited profit if the spot price is less than the strike price.
B) limit potential loss to a maximum equivalent of the strike price.
C) limit potential loss to the premium equivalent.
D) because it has a gut feeling that the underlying asset currency will appreciate.

Accepted Answer

Going long on a currency put option involves purchasing the option, which limits the potential loss to the premium paid for the option.

Question 16

A call option whose exercise price is less than the spot rate is said to be
A) in-the-money.
B) at-the-money.
C) out-of-the-money.
D) under-the-spot.

Accepted Answer

A call option is considered to be in-the-money when the exercise price is less than the spot rate. This means that the holder of the call option can buy the underlying asset at a lower price than its current market value, making it a profitable option to exercise.

Question 17

An option whose exercise price is equal to the spot rate is said to be
A) in-the-money.
B) at-the-money.
C) out-of-the-money.
D) on-the-spot.

Accepted Answer

An option whose exercise price is equal to the spot rate is said to be "at-the-money".

Question 18

The value of a European style call option is the sum of two components, the
A) present value plus the intrinsic value.
B) time value plus the present value.
C) 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, which is the difference between the stock price and the strike price if the stock price is higher than the strike price, and the time value, which is the value of the option beyond the intrinsic value and is affected by factors such as time remaining until expiration, volatility, and interest rates. Therefore, the correct choice is C, as it correctly identifies the two components of the value of a European style call option.

Question 19

The single largest interest rate risk of a firm is
A) interest sensitive securities.
B) debt service.
C) dividend payments.
D) accounts payable.

Accepted Answer

Debt service refers to the payment of principal and interest on a company's debt. A rise in interest rates would increase the cost of debt service, and therefore increase a company's interest expense and decrease its profitability. This makes debt service the single largest interest rate risk of a firm.

Question 20

All exchange-traded options are settled through a clearing house but over-the-counter options are not and are thus subject to greater ________ risk.
A) exchange rate
B) country
C) counterparty
D) none of the above

Accepted Answer

Counterparty risk refers to the risk that one party in a financial contract may default on their obligations to the other party. In the case of over-the-counter options, there is no clearing house involved to ensure that both parties fulfill their obligations, which increases the risk of one party defaulting. Exchange-traded options, on the other hand, are settled through a clearing house, which acts as an intermediary between the two parties and helps to minimize counterparty risk. Therefore, the correct answer is C - counterparty risk.

Quiz 7: Foreign Currency Derivatives and Swaps

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

The most widely used reference rate for standardized quotations, loan agreements, or financial derivative valuations is the

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

Assume that a call option has an exercise price of $1.50/³. At a spot price of $1.45/³, the call option has

What is the reason for an investor to pay for a zero intrinsic value option?

TABLE 7.1 Use the below mentioned table to answer the following question(s) . April 19, 2010, 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

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 .

TABLE 7.1 Use the below mentioned table to answer the following question(s) . April 19, 2010, 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, 2010?

The maximum profit that a writer of a call can make is

Other things equal, the price of an option goes up as the volatility of the option decreases.

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

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

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.)

Company's treasurer decides to go long on a currency put option to

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

An option whose exercise price is equal to the spot rate is said to be

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

The single largest interest rate risk of a firm is

All exchange-traded options are settled through a clearing house but over-the-counter options are not and are thus subject to greater ________ risk.