16) A call option on euros is written with a strike price of $1.30/euro. Which spot price
maximizes your profit if you choose to exercise the option before maturity?
A) $1.20/euro
B) $1.25/euro
C) $1.30/euro
D) $1.35/euro
17) A call option on UK pounds has a strike price of $2.05/£ and a cost of $0.02. What is the
break-even price for the option?
A) $2.03/£
B) $2.07/£
C) $2.05/£
D) The answer depends upon if this is a long or a short call option.
18) Your U.S firm has an accounts payable denominated in UK pounds due in 6 months. To
protect yourself against unexpected changes in the dollar/pound exchange rate you should:
A) buy a pound put option.
B) sell a pound put option.
C) buy a pound call option.
D) sell a pound call option.
19) The maximum gain for the purchaser of a call option contract is ________ while the
maximum loss is ________.
A) unlimited; the premium paid.
B) the premium paid; unlimited.
C) unlimited; unlimited.
D) unlimited; the value of the underlying asset.
20) The buyer of a long call 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 an unlimited maximum gain potential.
D) all of the above
21) Which of the following is NOT true for the writer of a call option?
A) The maximum loss is unlimited.
B) The maximum gain is unlimited.
C) The gain or loss is equal to but of the opposite sign of the buyer of a call option.
D) All of the above are true.
22) 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.
23) 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
24) 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.
25) The writer of the option is referred to as the seller, and the buyer of the option is referred to
as the holder.
26) Foreign currency options are available both over-the-counter and on organized exchanges.
27) Most option profits and losses are realized through taking actual delivery of the currency
rather than offsetting contracts.
28) Compare and contrast foreign currency options and futures. Identify situations when you
may prefer one vs. the other when speculating on foreign exchange.
AACSB: Application of knowledge
7.3 Option Pricing and Valuation
1) 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.
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
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.
4) 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).
5) 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.
6) 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.
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Copyright © 2016 Pearson Education, Inc.
7.4 Advanced Topic: Currency Option Pricing Sensitivity
1) 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/£.
2) As an option moves further in-the-money delta moves toward _______.
A) 0
B) -1
C) 1
D) large numbers
3) As an option moves further out-of-the-money, delta moves toward ______.
A) 1
B) 0
C) -1
D) large negative numbers
4) Option premiums deteriorate at an/a __________ as they approach expiration.
A) increasing rate
B) proportional
C) decreasing rate
D) less than proportional rate
5) Volatility is viewed the following ways EXCEPT:
A) historic.
B) forward-looking.
C) implied.
D) spot.
6) 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/£.
7) 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.
8) For a $1.50/£ call option with an initial premium of $0.033/£ and a rho value of 0.2, after an
increase in the U.S. dollar rate from 8% to 9% – the new ATM optiom premium would be:
A) $0.037/£.
B) $1.55/£.
C) $0.036/£.
D) $0.035/£.