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International Financial Management, 8e (Eun)
1) A put option on $15,000 with a strike price of €10,000 is the same thing as a call option on
€10,000 with a strike price of $15,000.
2) A CME contract on €125,000 with September delivery
A) is an example of a forward contract.
B) is an example of a futures contract.
C) is an example of a put option.
D) is an example of a call option.
3) Yesterday, you entered into a futures contract to buy €62,500 at $1.50 per €. Suppose the futures
price closes today at $1.46. How much have you made/lost?
A) Depends on your margin balance.
B) You have made $2,500.00.
C) You have lost $2,500.00.
D) You have neither made nor lost money, yet.
4) In reference to the futures market, a "speculator"
A) attempts to profit from a change in the futures price.
B) wants to avoid price variation by locking in a purchase price of the underlying asset through a
long position in the futures contract or a sales price through a short position in the futures contract.
C) stands ready to buy or sell contracts in unlimited quantity.
D) wants to avoid price variation by locking in a purchase price of the underlying asset through a
long position in the futures contract or a sales price through a short position in the futures contract,
and also stands ready to buy or sell contracts in unlimited quantity.
5) Comparing "forward" and "futures" exchange contracts, we can say that
A) they are both "marked-to-market" daily.
B) their major difference is in the way the underlying asset is priced for future purchase or sale:
futures settle daily and forwards settle at maturity.
C) a futures contract is negotiated by open outcry between floor brokers or traders and is traded on
organized exchanges, while forward contract is tailor-made by an international bank for its clients
and is traded OTC.
D) their major difference is in the way the underlying asset is priced for future purchase or sale:
futures settle daily and forwards settle at maturity, and a futures contract is negotiated by open
outcry between floor brokers or traders and is traded on organized exchanges, while a forward
contract is tailor-made by an international bank for its clients and is traded OTC.
6) Comparing "forward" and "futures" exchange contracts, we can say that
A) delivery of the underlying asset is seldom made in futures contracts.
B) delivery of the underlying asset is usually made in forward contracts.
C) delivery of the underlying asset is seldom made in either contract—they are typically cash
settled at maturity.
D) delivery of the underlying asset is seldom made in futures contracts and delivery of the
underlying asset is usually made in forward contracts.
7) In which market does a clearinghouse serve as a third party to all transactions?
A) Futures
B) Forwards
C) Swaps
D) none of the options
8) In the event of a default on one side of a futures trade,
A) the clearing member stands in for the defaulting party.
B) the clearing member will seek restitution for the defaulting party.
C) if the default is on the short side, a randomly selected long contract will not get paid. That party
will then have standing to initiate a civil suit against the defaulting short.
D) the clearing member stands in for the defaulting party and will seek restitution for the
defaulting party.
9) Yesterday, you entered into a futures contract to buy €62,500 at $1.50 per €. Your initial
performance bond is $1,500 and your maintenance level is $500. At what settle price will you get a
demand for additional funds to be posted?
A) $1.5160 per €.
B) $1.208 per €.
C) $1.1920 per €.
D) $1.4840 per €.
10) Yesterday, you entered into a futures contract to sell €75,000 at $1.79 per €. Your initial
performance bond is $1,500 and your maintenance level is $500. At what settle price will you get a
demand for additional funds to be posted?
A) $1.7767 per €.
B) $1.2084 per €.
C) $1.6676 per €.
D) $1.1840 per €.
11) Yesterday, you entered into a futures contract to buy €62,500 at $1.50/€. Your initial margin
was $3,750 (= 0.04 × €62,500 × $1.50/€ = 4 percent of the contract value in dollars). Your
maintenance margin is $2,000 (meaning that your broker leaves you alone until your account
balance falls to $2,000). At what settle price (use 4 decimal places) do you get a margin call?
A) $1.4720/€
B) $1.5280/€
C) $1.500/€
D) none of the options
12) Three days ago, you entered into a futures contract to sell €62,500 at $1.50 per €. Over the past
three days the contract has settled at $1.50, $1.52, and $1.54. How much have you made or lost?
A) Lost $0.04 per € or $2,500
B) Made $0.04 per € or $2,500
C) Lost $0.06 per € or $3,750
D) none of the options
13) Today's settlement price on a Chicago Mercantile Exchange (CME) yen futures contract is
$0.8011/¥100. Your margin account currently has a balance of $2,000. The next three days'
settlement prices are $0.8057/¥100, $0.7996/¥100, and $0.7985/¥100. (The contractual size of one
CME yen contract is ¥12,500,000). If you have a short position in one futures contract, the changes
in the margin account from daily marking-to-market will result in the balance of the margin
account after the third day to be
A) $1,425.
B) $2,000.
C) $2,325.
D) $3,425.
14) Today's settlement price on a Chicago Mercantile Exchange (CME) yen futures contract is
$0.8011/¥100. Your margin account currently has a balance of $2,000. The next three days'
settlement prices are $0.8057/¥100, $0.7996/¥100, and $0.7985/¥100. (The contractual size of one
CME yen contract is ¥12,500,000). If you have a long position in one futures contract, the changes
in the margin account from daily marking-to-market, will result in the balance of the margin
account after the third day to be
A) $1,425.
B) $1,675.
C) $2,000.
D) $3,425
15) Suppose the futures price is below the price predicted by IRP. What steps would assure an
arbitrage profit?
A) Go short in the spot market, go long in the futures contract.
B) Go long in the spot market, go short in the futures contract.
C) Go short in the spot market, go short in the futures contract.
D) Go long in the spot market, go long in the futures contract.
16) What paradigm is used to define the futures price?
A) IRP
B) Hedge Ratio
C) Black Scholes
D) Risk Neutral Valuation
17) Suppose you observe the following one-year interest rates, spot exchange rates and futures
prices. Futures contracts are available on €10,000. How much risk-free arbitrage profit could you
make on one contract at maturity from this mispricing?
Exchange Rate
Interest Rate
APR
S0($/€)
$1.45 = €1.00
i$
4%
F360($/€)
$1.48 = €1.00
i€
3%
A) $159.22
B) $153.10
C) $439.42
D) none of the options
18) Which equation is used to define the futures price?
A) =
B) =
C) =
D) F($ / €) - S($ / €) = -
19) Which equation is used to define the futures price?
A) =
B) =
C) =
D) =
20) If a currency futures contract (direct quote) is priced below the price implied by Interest Rate
Parity (IRP), arbitrageurs could take advantage of the mispricing by simultaneously
A) going short in the futures contract, borrowing in the domestic currency, and going long in the
foreign currency in the spot market.
B) going short in the futures contract, lending in the domestic currency, and going long in the
foreign currency in the spot market.
C) going long in the futures contract, borrowing in the domestic currency, and going short in the
foreign currency in the spot market.
D) going long in the futures contract, borrowing in the foreign currency, and going long in the
domestic currency, investing the proceeds at the local rate of interest.
21) Open interest in currency futures contracts
A) tends to be greatest for the near-term contracts.
B) tends to be greatest for the longer-term contracts.
C) typically decreases with the term to maturity of most futures contracts.
D) tends to be greatest for the near-term contracts, and typically decreases with the term to
maturity of most futures contracts.
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22) The "open interest" shown in currency futures quotations is
A) the total number of people indicating interest in buying the contracts in the near future.
B) the total number of people indicating interest in selling the contracts in the near future.
C) the total number of people indicating interest in buying or selling the contracts in the near
future.
D) the total number of long or short contracts outstanding for the particular delivery month.
23) If you think that the dollar is going to appreciate against the euro, you should
A) buy put options on the euro.
B) sell call options on the euro.
C) buy call options on the euro.
D) none of the options
24) From the perspective of the writer of a put option written on €62,500. If the strike price is
$1.55/€, and the option premium is $1,875, at what exchange rate do you start to lose money?
A) $1.52/€
B) $1.55/€
C) $1.58/€
D) none of the options
25) A European option is different from an American option in that
A) one is traded in Europe and one in traded in the United States.
B) European options can only be exercised at maturity; American options can be exercised prior to
maturity.
C) European options tend to be worth more than American options, ceteris paribus.
D) American options have a fixed exercise price; European options' exercise price is set at the
average price of the underlying asset during the life of the option.
26) An "option" is
A) a contract giving the seller (writer) of the option the right, but not the obligation, to buy (call) or
sell (put) a given quantity of an asset at a specified price at some time in the future.
B) a contract giving the owner (buyer) of the option the right, but not the obligation, to buy (call) or
sell (put) a given quantity of an asset at a specified price at some time in the future.
C) a contract giving the owner (buyer) of the option the right, but not the obligation, to buy (put) or
sell (call) a given quantity of an asset at a specified price at some time in the future.
D) a contract giving the owner (buyer) of the option the right, but not the obligation, to buy (put) or
sell (sell) a given quantity of an asset at a specified price at some time in the future.
27) An investor believes that the price of a stock, say IBM's shares, will increase in the next 60
days. If the investor is correct, which combination of the following investment strategies will show
a profit in all the choices?
(i) buy the stock and hold it for 60 days
(ii) buy a put option
(iii) sell (write) a call option
(iv) buy a call option
(v) sell (write) a put option
A) (i), (ii), and (iii)
B) (i), (ii), and (iv)
C) (i), (iv), and (v)
D) (ii) and (iii)
28) Most exchange traded currency options
A) mature every month, with daily resettlement.
B) have original maturities of 1, 2, and 3 years.
C) have original maturities of 3, 6, 9, and 12 months.
D) mature every month, without daily resettlement.
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29) The volume of OTC currency options trading is
A) much smaller than that of organized-exchange currency option trading.
B) much larger than that of organized-exchange currency option trading.
C) larger, because the exchanges are only repackaging OTC options for their customers.
D) none of the options
30) In the CURRENCY TRADING section of The Wall Street Journal, the following appeared
under the heading OPTIONS:
Philadelphia Exchange
Puts
Swiss France
69.33
62,500 Swiss Francs-cents per unit
Vol.
Last
68 May
12
0.30
69 May
50
0.50
Which combination of the following statements are true?
(i) The time values of the 68 May and 69 May put options are respectively .30 cents and .50 cents.
(ii) The 68 May put option has a lower time value (price) than the 69 May put option.
(iii) If everything else is kept constant, the spot price and the put premium are inversely related.
(iv) The time values of the 68 May and 69 May put options are, respectively, 1.63 cents and 0.83
cents.
(v) If everything else is kept constant, the strike price and the put premium are inversely related.
A) (i), (ii), and (iii)
B) (ii), (iii), and (iv)
C) (iii) and (iv)
D) (iv) and (v)
31) With currency futures options the underlying asset is
A) foreign currency.
B) a call or put option written on foreign currency.
C) a futures contract on the foreign currency.
D) none of the options
32) Exercise of a currency futures option results in
A) a long futures position for the call buyer or put writer.
B) a short futures position for the call buyer or put writer.
C) a long futures position for the put buyer or call writer.
D) a short futures position for the call buyer or put buyer.
33) A currency futures option amounts to a derivative on a derivative. Why would something like
that exist?
A) For some assets, the futures contract can have lower transaction costs and greater liquidity than
the underlying asset.
B) Tax consequences matter as well, and for some users an option contract on a future is more tax
efficient.
C) Transaction costs and liquidity
D) all of the options
34) The current spot exchange rate is $1.55 = €1.00 and the three-month forward rate is $1.60 =
€1.00. Consider a three-month American call option on €62,500. For this option to be considered
at-the-money, the strike price must be
A) $1.60 = €1.00.
B) $1.55 = €1.00.
C) $1.55 × = €1.00 × .
D) none of the options
35) The current spot exchange rate is $1.55 = €1.00 and the three-month forward rate is $1.60 =
€1.00. Consider a three-month American call option on €62,500 with a strike price of $1.50 =
€1.00. Immediate exercise of this option will generate a profit of
A) $6,125.
B) $6,125/(1 + )3/12.
C) negative profit, so exercise would not occur.
D) $3,125.
36) The current spot exchange rate is $1.55 = €1.00 and the three-month forward rate is $1.60 =
€1.00. Consider a three-month American call option on €62,500 with a strike price of $1.50 =
€1.00. If you pay an option premium of $5,000 to buy this call, at what exchange rate will you
break-even?
A) $1.58 = €1.00
B) $1.62 = €1.00
C) $1.50 = €1.00
D) $1.68 = €1.00
37) Consider this graph of a call option. The option is a three-month American call option on
€62,500 with a strike price of $1.50 = €1.00 and an option premium of $3,125. What are the values
of A, B, and C, respectively?
A) A = $3,125 (or $.05 depending on your scale); B = $1.50; C = $1.55
B) A = €3,750 (or €.06 depending on your scale); B = $1.50; C = $1.55
C) A = $.05; B = $1.55; C = $1.60
D) none of the options
38) Which of the lines is a graph of the profit at maturity of writing a call option on €62,500 with a
strike price of $1.20 = €1.00 and an option premium of $3,125?
A) A
B) B
C) C
D) D
39) The current spot exchange rate is $1.55 = €1.00; the three-month U.S. dollar interest rate is 2
percent. Consider a three-month American call option on €62,500 with a strike price of $1.50 =
€1.00. What is the least that this option should sell for?
A) $0.05 × 62,500 = $3,125
B) $3,125/1.02 = $3,063.73
C) $0.00
D) none of the options
40) Which of the follow options strategies are consistent in their belief about the future behavior of
the underlying asset price?
A) Selling calls and selling puts
B) Buying calls and buying puts
C) Buying calls and selling puts
D) none of the options
41) American call and put premiums
A) should be at least as large as their intrinsic value.
B) should be no larger than their intrinsic value.
C) should be exactly equal to their time value.
D) should be no larger than their speculative value.
42) Which of the following is correct?
A) Time value = intrinsic value + option premium
B) Intrinsic value = option premium + time value
C) Option premium = intrinsic value – time value
D) Option premium = intrinsic value + time value
43) Which of the following is correct?
A) European options can be exercised early.
B) American options can be exercised early.
C) Asian options can be exercised early.
D) all of the options
44) Assume that the dollar–euro spot rate is $1.28 and the six-month forward rate is
= $1.28 = $1.2864. The six-month U.S. dollar rate is 5 percent and the
Eurodollar rate is 4 percent. The minimum price that a six-month American call option with a
striking price of $1.25 should sell for in a rational market is
A) 0 cents.
B) 3.47 cents.
C) 3.55 cents.
D) 3 cents.
45) For European options, what is the effect of an increase in St?
A) Decrease the value of calls and puts ceteris paribus
B) Increase the value of calls and puts ceteris paribus
C) Decrease the value of calls, increase the value of puts ceteris paribus
D) Increase the value of calls, decrease the value of puts ceteris paribus
46) For an American call option, A and B in the graph are
A) time value and intrinsic value.
B) intrinsic value and time value.
C) in-the-money and out-of-the money.
D) none of the options
47) For European options, what is the effect of an increase in the strike price E?
A) Decrease the value of calls and puts ceteris paribus
B) Increase the value of calls and puts ceteris paribus
C) Decrease the value of calls, increase the value of puts ceteris paribus
D) Increase the value of calls, decrease the value of puts ceteris paribus
48) For European currency options written on euro with a strike price in dollars, what is the effect
of an increase in r$ relative to r€?
A) Decrease the value of calls and puts ceteris paribus
B) Increase the value of calls and puts ceteris paribus
C) Decrease the value of calls, increase the value of puts ceteris paribus
D) Increase the value of calls, decrease the value of puts ceteris paribus
49) For European currency options written on euro with a strike price in dollars, what is the effect
of an increase in r$?
A) Decrease the value of calls and puts ceteris paribus
B) Increase the value of calls and puts ceteris paribus
C) Decrease the value of calls, increase the value of puts ceteris paribus
D) Increase the value of calls, decrease the value of puts ceteris paribus
50) For European currency options written on euro with a strike price in dollars, what is the effect
of an increase in r€?
A) Decrease the value of calls and puts ceteris paribus
B) Increase the value of calls and puts ceteris paribus
C) Decrease the value of calls, increase the value of puts ceteris paribus
D) Increase the value of calls, decrease the value of puts ceteris paribus
51) For European currency options written on euro with a strike price in dollars, what is the effect
of an increase in the exchange rate S($/€)?
A) Decreases the value of calls and puts ceteris paribus
B) Increases the value of calls and puts ceteris paribus
C) Decreases the value of calls, increases the value of puts ceteris paribus
D) Increases the value of calls, decreases the value of puts ceteris paribus
52) For European currency options written on euro with a strike price in dollars, what is the effect
of an increase in the exchange rate S(€/$)?
A) Decreases the value of calls and puts ceteris paribus
B) Increases the value of calls and puts ceteris paribus
C) Decreases the value of calls, increases the value of puts ceteris paribus
D) Increases the value of calls, decreases the value of puts ceteris paribus
53) The hedge ratio
A) Is the size of the long (short) position the investor must have in the underlying asset per option
the investor must write (buy) to have a risk-free offsetting investment that will result in the
investor perfectly hedging the option.
B)
C) Is related to the number of options that an investor can write without unlimited loss while
holding a certain amount of the underlying asset.
D) all of the options
54) Find the value of a call option written on €100 with a strike price of $1.00 = €1.00. In one
period, there are two possibilities: the exchange rate will move up by 15 percent or down by 15
percent (i.e. $1.15 = €1.00 or $0.85 = €1.00). The U.S. risk-free rate is 5 percent over the period.
The risk-neutral probability of dollar depreciation is 2/3 and the risk-neutral probability of the
dollar strengthening is 1/3.
A) $9.5238
B) $0.0952
C) $0
D) $3.1746
55) Use the binomial option pricing model to find the value of a call option on £10,000 with a
strike price of €12,500. The current exchange rate is €1.50/£1.00 and in the next period the
exchange rate can increase to €2.40/£ or decrease to €0.9375/€1.00 (i.e. u = 1.6 and d = 1/u =
0.625). The current interest rates are i€ = 3% and are i£ = 4%. Choose the answer closest to yours.
A) €3,275
B) €2,500
C) €3,373
D) €3,243
