Question 1

If an actual put option premium is less than what is suggested by the put-call parity relationship, arbitrage can be conducted.

Accepted Answer

Put-call parity is a fundamental principle in options pricing that relates the prices of put and call options on the same stock. If the actual put option premium is less than what is suggested by the put-call parity relationship, an arbitrage opportunity arises. This is because an investor can exploit the price difference between the actual put option premium and the theoretical price predicted by put-call parity by purchasing the cheaper put option and simultaneously selling the more expensive call option. The investor can then earn a risk-free profit from the difference in premiums.

Question 2

Due to put-call parity, we can use the same formula to price calls and puts.

Accepted Answer

Put-call parity is a financial principle that defines a specific relationship between the price of European call and put options, but it does not imply that the same formula can be used to price both.

Question 3

Both call and put option premiums are affected by the level of the existing spot price relative to the strike price; for example, a high spot price relative to the strike price will result in a relatively high premium for a call option but a relatively low premium for a put option.

Accepted Answer

This statement is correct. The premium for a call option will increase as the spot price goes up, while the premium for a put option will decrease as the spot price increases. The opposite will be true if the spot price is lower than the strike price.

Question 4

Since futures contracts are traded on an exchange, the exchange will always take the "other side" of the transaction in terms of accepting the credit risk.

Accepted Answer

The exchange acts as an intermediary and clearinghouse, ensuring both parties fulfill their obligations, thus mitigating credit risk.

Question 5

If you have bought the right to sell, you are a:
A) call writer.
B) put buyer.
C) futures buyer.
D) put writer.

Accepted Answer

The answer of If you have bought the right to...

Question 6

The price of a futures contract will generally vary significantly from that of a forward contract.

Accepted Answer

The price of a futures contract is generally similar to that of a forward contract, as both are derived from the same underlying asset and have similar pricing models. However, differences may arise due to factors like margin requirements, liquidity, and settlement procedures.

Question 7

If the futures rate is lower than the forward rate, astute investors would attempt to simultaneously buy futures and sell forward. Such actions would place downward pressure on the futures price and upward pressure on the forward rate.

Accepted Answer

The answer of If the futures rate is lower than...

Question 8

If an investor who previously sold futures contracts wishes to liquidate his position, he could sell futures contracts with the same maturity date.

Accepted Answer

To liquidate a short position in futures contracts, the investor needs to buy back the same number of contracts with the same maturity date, not sell them.

Question 9

The purchase of a currency put option would be appropriate for which of the following?
A) Investors who expect to buy a foreign bond in one month.
B) Corporations who expect to buy foreign currency to finance foreign subsidiaries.
C) Corporations who expect to collect on a foreign account receivable in one month.
D) all of the above

Accepted Answer

A currency put option provides the buyer with the right, but not the obligation, to sell a specific amount of a currency at a predetermined exchange rate on or before a specific expiration date. This would be appropriate for corporations who expect to buy foreign currency to finance foreign subsidiaries as it can help mitigate the risk of unfavorable currency movements. Option A is incorrect as investors who expect to buy a foreign bond in one month would typically purchase a currency call option to hedge against potential currency appreciation. Option C is also incorrect as a currency call option would be more appropriate for corporations who expect to collect on a foreign account receivable in one month as it would protect against potential currency depreciation.

Question 10

Non-deliverable forward contracts (NDFs) are frequently used for currencies in emerging markets.

Accepted Answer

Non-deliverable forward contracts (NDFs) are commonly used for currencies in emerging markets because they allow investors to hedge their currency risk without actually needing to physically exchange the currency. This is particularly useful in markets where there are restrictions on foreign exchange transactions or where the currency is not widely traded.

Question 11

The lower bound of the call option premium is the greater of zero and the difference between the spot rate and the exercise price; the upper bound of a currency call option is the spot rate.

Accepted Answer

The lower bound of a call option is the greater of zero and the difference between the spot rate and the exercise price, while the upper bound is the spot rate, as the option cannot be worth more than the underlying asset itself.

Question 12

The lower bound of a put option premium is the greater of zero and the difference between the exercise price and the spot rate; the upper bound of a currency put option is the exercise price.

Accepted Answer

This statement is true. The lower bound of a put option premium is the intrinsic value, which is the greater of zero and the difference between the exercise price and the spot rate. The upper bound of a put option is the exercise price.

Question 13

Forward contracts are usually liquidated by actual delivery of the currency, while futures contracts are usually liquidated by offsetting transactions.

Accepted Answer

This is correct. Forward contracts involve actual delivery of the currency, while futures contracts involve offsetting transactions.

Question 14

Currency options are only traded on exchanges. That is, there is no over-the-counter market for options.

Accepted Answer

Currency options can be traded both on exchanges and over-the-counter (OTC) markets.

Question 15

The writer of a call option is obligated to sell the underlying currency to the buyer of the option if the option is exercised.

Accepted Answer

When a call option is exercised, the buyer has the right to purchase the underlying asset at the strike price. The writer/seller of the call option is then obligated to sell the underlying asset to the buyer at the strike price. In the case of currency options, this means the writer of a call option is obligated to sell the underlying currency to the buyer if the option is exercised.

Question 16

Which of the following is true of options?
A) The writer decides whether the option will be exercised.
B) The writer pays the buyer the option premium.
C) The buyer decides if the option will be exercised.
D) More than one of these.

Accepted Answer

Options give the buyer the right, but not the obligation, to buy or sell a security at a specified price within a specified period of time. The buyer has the decision-making power on whether to exercise the option or not. The writer of the option receives the option premium, but does not have the power to decide whether the option will be exercised.

Question 17

Your company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to hedge your position by selling Japanese yen forward. The current spot rate of the yen is $.0089, while the forward rate is $.0095. You expect the spot rate in 60 days to be $.0090. How many dollars will you receive for the 5,000,000 yen 60 days from now?
A)$44,500.
B)$45,000.
C)$526 million.
D)$47,500.

Accepted Answer

¥5,000,000 × $.0095/¥ = $47,500

Question 18

If you have a position where you might be obligated to buy Euros, you are:
A) a call writer.
B) a put writer.
C) a put buyer.
D) a futures seller.

Accepted Answer

If you have a position where you might be obligated to buy Euros, you are a put buyer. This is because a put buyer has the right, but not the obligation, to sell an asset at a specified price on or before a certain date. In this case, the asset would be Euros, and the specified price would be the strike price of the put option.

Question 19

The spot rate for the Singapore dollar is $.588. The 30-day forward rate is $.590. The forward rate contains an annualized ____ of ____%.
A)discount; -4.07
B)premium; 4.07
C)discount; -4.08
D)premium; 4.08
E)premium; 3.40

Accepted Answer

($.59 - $.588)/$.588 × (360/30) = 4.08%

Question 20

Which of the following is true for futures, but not for forwards?
A) actual delivery.
B) no transactions costs.
C) self regulation.
D)none of the above

Accepted Answer

The answer of Which of the following is true for...

Quiz 5: Currency Derivatives

If an actual put option premium is less than what is suggested by the put-call parity relationship, arbitrage can be conducted.

Due to put-call parity, we can use the same formula to price calls and puts.

Both call and put option premiums are affected by the level of the existing spot price relative to the strike price; for example, a high spot price relative to the strike price will result in a relatively high premium for a call option but a relatively low premium for a put option.

Since futures contracts are traded on an exchange, the exchange will always take the "other side" of the transaction in terms of accepting the credit risk.

If you have bought the right to sell, you are a:

The price of a futures contract will generally vary significantly from that of a forward contract.

If the futures rate is lower than the forward rate, astute investors would attempt to simultaneously buy futures and sell forward. Such actions would place downward pressure on the futures price and upward pressure on the forward rate.

If an investor who previously sold futures contracts wishes to liquidate his position, he could sell futures contracts with the same maturity date.

The purchase of a currency put option would be appropriate for which of the following?

Non-deliverable forward contracts (NDFs) are frequently used for currencies in emerging markets.

The lower bound of the call option premium is the greater of zero and the difference between the spot rate and the exercise price; the upper bound of a currency call option is the spot rate.

The lower bound of a put option premium is the greater of zero and the difference between the exercise price and the spot rate; the upper bound of a currency put option is the exercise price.

Forward contracts are usually liquidated by actual delivery of the currency, while futures contracts are usually liquidated by offsetting transactions.

Currency options are only traded on exchanges. That is, there is no over-the-counter market for options.

The writer of a call option is obligated to sell the underlying currency to the buyer of the option if the option is exercised.

Which of the following is true of options?

If you have a position where you might be obligated to buy Euros, you are:

The spot rate for the Singapore dollar is $.588. The 30-day forward rate is $.590. The forward rate contains an annualized of %.

Which of the following is true for futures, but not for forwards?