Question 1

Suppose you are holding a long position in a euro futures contract that matures in 76 days.The agreed-upon price is $1.15 for 125,000 euro.At the close of trading today,the futures price has risen to $1.155.Under marking to market,you now
A)hold a futures contract that has risen in value by $1,250
B)hold a futures contract that has fallen in value by $625
C)will receive $625 and a new futures contract priced at $1.155
D)must pay over $1,250 to the seller of the futures contract

Accepted Answer

Under marking to market, the gain is calculated as the difference in the futures price multiplied by the contract size: ($1.155 - $1.15) * 125,000 = $625. You will receive this amount and the contract will be marked to the new price of $1.155.

Question 2

Major advantages of futures contracts include the
A)large number of currencies traded
B)extensive delivery dates available
C)freedom to liquidate the contract at any time before its maturity
D)unlimited contract sizes

Accepted Answer

Futures contracts offer the flexibility to be liquidated or offset before maturity, allowing traders to exit positions as needed.

Question 3

The value of a European option always
A)exceeds its intrinsic value
B)rises with the time to maturity
C)rises with the interest rate
D)rises with the volatility of the exchange rate

Accepted Answer

The value of a European option increases with the volatility of the underlying asset because higher volatility increases the potential for the option to end up in-the-money.

Question 4

Suppose the current spot rate for the Australian dollar is U.S.$0.8321.The intrinsic value of an A$50,000 call option with an exercise price of U.S.$0.8195 is
A)$0
B)$630
C)$740
D)$2,340

Accepted Answer

The answer of Suppose the current spot rate for the...

Question 5

You can speculate on a pound depreciation by
A)selling pound futures and buying a pound call option
B)buying pound futures and a pound put option
C)selling pound futures and a pound put option
D)none of the above

Accepted Answer

The answer of You can speculate on a pound depreciation...

Question 6

Suppose that the interbank forward bid for March 20 on Swiss francs is $0.7827 at the same time that the price of IMM Swiss franc futures for delivery on March 20 is $0.7795.How much of an arbitrage profit could a dealer earn per March Swiss franc futures contract of SFr 125,000?
A)$400
B)$68
C)$215
D)$58

Accepted Answer

The arbitrage profit is calculated by taking the difference between the forward bid price and the futures price, then multiplying by the contract size. The difference is $0.7827 - $0.7795 = $0.0032. Multiplying by SFr 125,000 gives $400.

Question 7

Suppose the current spot rate for the pound is $01.7427.A put option with an exercise price of $01.7550 is said to be
A)in-the-money
B)out-of-the-money
C)at-the-money
D)past breakeven

Accepted Answer

A put option is in-the-money when the exercise price is above the current spot rate, as it allows the holder to sell the currency at a higher price than the current market rate. In this case, the exercise price ($01.7550) is higher than the current spot rate ($01.7427), making the put option in-the-money.

Question 8

What is the name for the value of the option that is the amount by which the option is in-the-money?
A)intrinsic value
B)economic value
C)market price
D)the currency spread

Accepted Answer

The value of the option that is the amount by which the option is in-the-money is called the intrinsic value. This value represents the actual value of the option if it were exercised immediately.

Question 9

Suppose the current spot rate for the euro is $1.3427.A call option with an exercise price of $1.3550 is said to be
A)in-the-money
B)out-of-the-money
C)at-the-money
D)past breakeven

Accepted Answer

An option is considered in-the-money if the spot rate is higher than the exercise price, at-the-money if they are equal, and out-of-the-money if the spot rate is lower than the exercise price. In this case, the exercise price of $1.3550 is higher than the current spot rate of $1.3427, making the option out-of-the-money.

Question 10

Which of the following has provided a major inducement for speculators to participate in the futures market?
A)low margin requirements
B)low bid?ask spreads
C)high volume compared to the forward market
D)all of the above

Accepted Answer

The answer of Which of the following has provided a...

Question 11

Suppose it is January 1990 and the current spot rate for the DM is $0.5925.The call premium on a call option with an exercise price of $0.5675 is $0.0373.What is the intrinsic value of one DM 62,500 call option?
A)$2,331.25
B)$1,562.50
C)$950.00
D)$768.75

Accepted Answer

The intrinsic value of a call option is calculated as the difference between the spot rate and the exercise price, multiplied by the contract size. Here, it is ($0.5925 - $0.5675) * 62,500 = $1,562.50.

Question 12

The time value of a European option
A)is always positive for an out-of-the-money option
B)is always positive for an in-the-money option
C)is always positive for an at-the-money option
D)decreases with the time that remains until the option expires

Accepted Answer

The answer of The time value of a European option
A)is...

Question 13

shows how much money must be in the futures market account balance when the contract is first entered into.It is the
A)initial performance bond
B)performance bond call
C)maintenance performance bond
D)account balance

Accepted Answer

The initial performance bond, also known as initial margin, is the amount of money that must be in the futures market account balance when the contract is first entered into. This ensures that the trader can meet their obligations and reduces the risk of default.

Question 14

The basic differences)between forward and futures contracts is that
A)forward contracts are individually tailored while futures contracts are standardized
B)forward contracts are negotiated with banks whereas futures contracts are bought and sold on an organized exchange
C)forward contracts have no daily limits on price fluctuations whereas futures contracts have a daily limit on price fluctuations
D)all of the above

Accepted Answer

All the options listed are correct differences between forward and futures contracts. Forward contracts are customizable and privately negotiated, typically not involving a standardized exchange, and do not have daily price fluctuation limits. In contrast, futures contracts are standardized, traded on organized exchanges, and often have daily price fluctuation limits.

Question 15

What is the name of the market in the U.S.where trade takes place in currency futures? The
A)United Currency Options Market
B)Philadelphia Stock Exchange
C)New York Futures Market
D)Chicago Mercantile Exchange

Accepted Answer

The Chicago Mercantile Exchange (CME) is the market in the U.S. where trade takes place in currency futures. The CME offers futures contracts for major currencies such as the US dollar, euro, Japanese yen, British pound, Swiss franc, Canadian dollar, Australian dollar, and New Zealand dollar.

Question 16

Options traded in the interbank market are known as
A)listed options
B)exchange-traded options
C)over-the-counter options
D)long-term options

Accepted Answer

Options traded in the interbank market are known as over-the-counter (OTC) options. Listed options are traded on exchanges, while exchange-traded options are also traded on exchanges but are standardized contracts. Long-term options refer to options with longer expiration dates.

Question 17

In the currency futures market,what is the term that describes the number of contracts in a currency outstanding at any one time?
A)open interest
B)closed interest
C)long position
D)in-the-money

Accepted Answer

Open interest is the term that describes the number of contracts in a currency outstanding at any one time in the currency futures market. It is a key indicator of market liquidity and demand for a particular currency contract. Closed interest is not a term used in currency futures trading. Long position and in-the-money are related to options trading and do not describe the number of contracts outstanding in the currency futures market.

Question 18

major disadvantage of forward and futures contracts relative to options is that the forwards and futures contracts
A)cannot protect the holder against the risk of adverse movements in exchange rates
B)are more expensive
C)are available only for relatively short maturities
D)eliminate the possibility of gaining a windfall profit from favorable movements in exchange rates

Accepted Answer

Forward and futures contracts obligate the buyer to purchase and the seller to sell an asset at a set price on a future date, regardless of the market price at that time. This means that while they protect against losses from adverse price movements, they also prevent the holder from benefiting from favorable price movements, unlike options, which give the right but not the obligation to buy or sell an asset, allowing for potential windfall profits.

Question 19

Suppose it is May 1998 and the current spot rate for the DM is $0.5925.The call premium on a call option with an exercise price of $0.5675 is $0.0373.What is the time value of one DM 62,500 call option?
A)$2,331.25
B)$1,562.50
C)$950.00
D)$768.75

Accepted Answer

The time value of an option is calculated by subtracting the intrinsic value from the total premium. The intrinsic value is the difference between the spot rate and the exercise price, if the option is in the money. Here, the intrinsic value per DM is $0.5925 - $0.5675 = $0.025. For a DM 62,500 call option, the intrinsic value is $0.025 * 62,500 = $1,562.50. The total premium for the option is $0.0373 * 62,500 = $2,331.25. Therefore, the time value is $2,331.25 - $1,562.50 = $768.75.

Question 20

Which one of the following is credited with an important role on the Chicago Mercantile Exchange because,in the process of realizing profit opportunities,they keep futures rates in line with bank forward rates?
A)speculators
B)hedgers
C)arbitrageurs
D)currency traders

Accepted Answer

Arbitrageurs are credited with an important role on the Chicago Mercantile Exchange because they take advantage of price differences between futures prices and bank forward rates, which helps to keep futures rates in line with bank forward rates. As a result, arbitrageurs help to maintain a more efficient and stable market.

Quiz 8: Currency Futures and Options Markets

Suppose you are holding a long position in a euro futures contract that matures in 76 days.The agreed-upon price is $1.15 for 125,000 euro.At the close of trading today,the futures price has risen to $1.155.Under marking to market,you now

Major advantages of futures contracts include the

The value of a European option always

Suppose the current spot rate for the Australian dollar is U.S.$0.8321.The intrinsic value of an A$50,000 call option with an exercise price of U.S.$0.8195 is

You can speculate on a pound depreciation by

Suppose that the interbank forward bid for March 20 on Swiss francs is $0.7827 at the same time that the price of IMM Swiss franc futures for delivery on March 20 is $0.7795.How much of an arbitrage profit could a dealer earn per March Swiss franc futures contract of SFr 125,000?

Suppose the current spot rate for the pound is $01.7427.A put option with an exercise price of $01.7550 is said to be

What is the name for the value of the option that is the amount by which the option is in-the-money?

Suppose the current spot rate for the euro is $1.3427.A call option with an exercise price of $1.3550 is said to be

Which of the following has provided a major inducement for speculators to participate in the futures market?

Suppose it is January 1990 and the current spot rate for the DM is $0.5925.The call premium on a call option with an exercise price of $0.5675 is $0.0373.What is the intrinsic value of one DM 62,500 call option?

The time value of a European option

shows how much money must be in the futures market account balance when the contract is first entered into.It is the

The basic differences) between forward and futures contracts is that

What is the name of the market in the U.S.where trade takes place in currency futures? The

Options traded in the interbank market are known as

In the currency futures market,what is the term that describes the number of contracts in a currency outstanding at any one time?

major disadvantage of forward and futures contracts relative to options is that the forwards and futures contracts

Suppose it is May 1998 and the current spot rate for the DM is $0.5925.The call premium on a call option with an exercise price of $0.5675 is $0.0373.What is the time value of one DM 62,500 call option?

Which one of the following is credited with an important role on the Chicago Mercantile Exchange because,in the process of realizing profit opportunities,they keep futures rates in line with bank forward rates?