Question 1

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

Accepted Answer

Volatility is not viewed as spot volatility, but it can be viewed as historic volatility (based on past prices), forward-looking volatility (based on predictions of future prices), and implied volatility (based on option prices).

Question 2

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 statement is true. The roles of seller and holder are important distinctions in the options market.

Question 3

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 4

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's maximum loss is equal to the premium paid, as this is the most they can lose if the option expires worthless.
B) The buyer's gain is equal to but opposite in sign to the writer, meaning that if the writer loses money, the buyer gains money, and vice versa.
C) The buyer's maximum gain potential is limited to the difference between the strike price (the price at which the buyer can sell the underlying asset) and the premium paid. If the underlying asset drops below the strike price, the buyer can exercise the option and sell the asset at the strike price, thereby realizing a profit equal to the difference between the strike price and the asset's current market price. However, their maximum profit is limited to this difference.

Question 5

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 delta approaches zero. Delta measures the sensitivity of the option price to changes in the underlying asset price. When an option is deep out-of-the-money, the likelihood of it finishing in-the-money is low, so changes in the underlying asset price have little impact on its value, resulting in a delta close to zero.

Question 6

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 7

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

Accepted Answer

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

Question 8

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 9

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 composed of two parts: intrinsic value and time value. The intrinsic value is the difference between the current market price of the underlying asset and the strike price of the option. The time value is the premium paid for the option in anticipation of potential future changes in the market price of the underlying asset. Therefore, the correct answer is C, the intrinsic value plus the time value.

Question 10

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

This is known as the time value of an option and it represents the additional premium paid for the possibility of the option's intrinsic value increasing before expiration.

Question 11

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 now is the best choice because when volatility falls, the value of options decreases, benefiting the option seller. Buying futures or buying options now is not a good choice as it does not take into account the belief that volatilities will fall in the near-term. Selling futures now is also not the best option as it requires a short-term bearish view which is not necessarily related to the belief in volatility falling.

Question 12

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 due to the acceleration of time decay, also known as theta decay.

Question 13

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 14

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 above factors, including the present spot rate, time to maturity, and the standard deviation of the daily spot price movement, are important in determining the premium price of a currency option.

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 optiom premium would be:
A) $0.036/£.
B) $0.037/£.
C) $0.004/£.
D) $1.54/£.

Accepted Answer

To calculate the new option premium, we need to use the Black-Scholes model and use the following formula:

New option premium = Old option premium x (New volatility / Old volatility)^(Lambda/2)

Plugging in the values:

New option premium = 0.033 x (0.11/0.10)^(0.4/2)

New option premium = 0.037/£

Therefore, the answer is B.

Question 16

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

Accepted Answer

As an option moves further in-the-money, the delta moves toward 1. The delta represents the rate of change of the option price with respect to the underlying asset price. When an option is in-the-money, its price becomes more sensitive to changes in the underlying asset price, meaning the option's delta approaches 1.

Question 17

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 18

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

Accepted Answer

Most currency options are settled in cash rather than through actual delivery. Therefore, profits and losses are typically realized through offsetting contracts rather than physical currency delivery.

Question 19

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

The change in spot rate is $0.01/£ ($1.71/£ - $1.70/£). Since the delta of the option is 0.5, the option premium will change by half of the change in spot rate, which is $0.005/£ ($0.01/£ x 0.5). Therefore, the new option premium would be the initial premium of $0.033/£ plus the change in premium of $0.005/£, which equals $0.038/£. Option B is the correct answer.

Question 20

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 a call option is the difference between the spot price and the exercise price, so with a spot price of $1.45/£ and an exercise price of $1.50/£, the intrinsic value is $0.00. The time value is the difference between the option price and the intrinsic value, but we do not have enough information to calculate the option price.

Quiz 7: Foreign Currency Derivatives: Futures and Options

Volatility is viewed the following ways EXCEPT:

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

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).

The buyer (long) of a put option:

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

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

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

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.

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

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.

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

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

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

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

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 optiom premium would be:

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

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

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

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:

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