9) For a $1.50/£ call option with an initial premium of $0.033/£ and a phi value of -0.2, after an
increase in the foreign interest (the pound sterling rate) rate from 8% to 9% – the new optiom
premium would be:
A) $0.035/£.
B) $1.48/£.
C) $0.031/£.
D) $0.032/£.
10) The Delta of an option is defined as:
A) expected change in the option premium for a small change in time to expiration.
B) expected change in the option premium for a small change in volatility.
C) expected change in the option premium for a small change in the spot rate.
D) expected change in the option premium for a small change in the domestic interest rate.
11) The Theta of an option is defined as:
A) expected change in the option premium for a small change in time to expiration.
B) expected change in the option premium for a small change in volatility.
C) expected change in the option premium for a small change in the spot rate.
D) expected change in the option premium for a small change in the domestic interest rate.
12) The Lambda of an option is defined as:
A) expected change in the option premium for a small change in time to expiration.
B) expected change in the option premium for a small change in volatility.
C) expected change in the option premium for a small change in the spot rate.
D) expected change in the option premium for a small change in the domestic interest rate.
13) The Rho of an option is defined as:
A) expected change in the option premium for a small change in time to expiration.
B) expected change in the option premium for a small change in volatility.
C) expected change in the option premium for a small change in the foreign interest rate.
D) expected change in the option premium for a small change in the domestic interest rate.
14) The Phi of an option is defined as:
A) expected change in the option premium for a small change in time to expiration.
B) expected change in the option premium for a small change in volatility.
C) expected change in the option premium for a small change in the foreign interest rate.
D) expected change in the option premium for a small change in the domestic interest rate.
15) Which of the following statements is NOT true about currency option pricing sensitivities?
A) The higher the delta, the more likely the option will move in-the-money
B) Premiums rise with increases in volatility
C) Premiums are relatively insensitive during the first days
D) Increases in domestic interest rates cause decreasing call option premiums
16) 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).
17) Standard foreign currency options are priced around the forward rate.
18) As long as the option has time remaining before expiration, the option will possess time the
time value element.
19) If an American-style option possesses time value on any day up to expiration date, the option
holder would get more by selling it than exercising it.
20) The value of any option that is currently in-the-money (ITM) is made up entirely of time
value.
21) The sensitivity of the option premium to a small change in the spot exchange rate is called
the gamma.
22) If the rho of the specific option is known, it is easy to determine how the option’s value will
change as the spot rate changes.
23) The higher the delta the greater the probability of the option expiring in-the-money.
24) Option values increase with the length of time to maturity. The expected change in the option
premium from a small change in the time to expiration is termed delta.
25) The majority of the option premium is lost in the final days prior to expiration.
26) A trader who is buying options of longer maturities will pay more, and proportionately more,
for the longer maturity options.
27) Option volatility is defined as the square root of the standard deviation of daily percentage
changes in the underlying exchange rate.
28) If the exchange rate’s volatility is rising, and therefore the risk of the option not being
exercised is decreasing, the option premium would be increasing.
29) The primary problem with volatility is that it is unobservable; it is the only input into the
option pricing formula that is determined subjectively by the trader pricing the option.
30) Historical volatility is the correct method for the calculation of the option volatility.
31) Traders by using the historical volatility assume that the immediate future will be the same as
the recent past, and the historical volatility will equal the forward-looking volatility.
32) A trader who is purchasing a call option on foreign currency should do so before the
domestic interest rate rises.
33) The expected change in the option premium from a small change in the domestic interest rate
(home currency) is term rho.
34) The expected change in the option premium from a small change in the foreign interest rate
(foreign currency) is term vega.
35) List and explain three “Greek” elements and impacts on a call option premium.