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Version 1 1
Student name:__________
1) 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.
2) Which of the following does not describe a futures contract?
A) Traded competitively on organized exchanges.
B) Traded by bank dealers via a network of telephones and computerized dealing
systems.
C) Standardized amount of the underlying asset.
D) Standardized deliver dates.
3) Which of the following does describe a forward contract?
A) Traded competitively on organized exchanges.
B) Traded by bank dealers via a network of telephones and computerized dealing
systems.
C) Standardized amount of the underlying asset.
D) Standardized deliver dates.
4) 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?
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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.
5) 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.
6) 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 traded on an organized exchange, 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 traded on an
organized exchange, while a forward contract is tailor-made by an international bank for its
clients and is traded OTC.
7) Comparing "forward" and "futures" exchange contracts, we can say that
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A) delivery of the underlying asset is seldom made in futures and forward contracts.
B) delivery of the underlying asset is usually made in futures and forward contracts.
C) delivery of the underlying asset is never 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.
8) 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
9) A limit as to how much the settlement price an increase or decrease from the previous
day’s settlement describes a?
A) commission
B) clearinghouse
C) daily price limit
D) none of the options
10) 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.
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11) 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 €.
12) 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) $1.8033 per €.
B) $1.2084 per €.
C) $1.6676 per €.
D) $1.1840 per €.
13) 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
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14) 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
15) 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.
16) 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) $3,425
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17) Suppose the futures price is below the price predicted by IRP. What steps would a
speculator take to attempt to profit?
A) Go long in the futures contract.
B) Go short in the futures contract.
C) Go short in the spot market.
D) Go long in the spot market.
18) What paradigm is used to define the futures price?
A) IRP
B) Hedge Ratio
C) Black Scholes
D) Risk Neutral Valuation
19) Suppose you observe the following one-year interest rates, spot exchange rates and
futures prices. Futures contracts are available on €10,000. How much risk-free arbitrage profit
could you make on one contract at maturity from this mispricing?
Exchange Rate
Interest Rate
APR
S0($/€)
$1.45 = €1.00
i$
4%
F360($/€)
$1.48 = €1.00
i€
3%
A) $159.22
B) $153.10
C) $439.42
D) none of the options
20) Which equation is used to define the futures price?
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A)
B)
C)
D)
21) Which equation is used to define the futures price?
A)
B)
C)
D)
22) 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.
23) Open interest in currency futures contracts
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A) tends to be greatest for the near-term contracts, and typically increases with the term
to maturity of most futures contracts.
B) tends to be greatest for the longer-term contracts.
C) typically increases 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.
24) 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.
25) If you think that the dollar is going to depreciate 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
26) 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?
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A) $1.52/€
B) $1.55/€
C) $1.58/€
D) none of the options
27) 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.
28) 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.
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29) 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?
1. (i) buy the stock and hold it for 60 days
2. (ii) buy a put option
3. (iii) sell (write) a call option
4. (iv) buy a call option
5. (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)
30) 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.
31) 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
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32) In the CURRENCY TRADING section of The Wall Street Journal, the following
appeared under the heading OPTIONS:
Philadelphia Exchange
Puts
Swiss Franc
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?
1. (i) The time values of the 68 May and 69 May put options are respectively .30 cents and .50
cents.
2. (ii) The 68 May put option has a lower time value (price) than the 69 May put option.
3. (iii) If everything else is kept constant, the spot price and the put premium are inversely
related.
4. (iv) The time values of the 68 May and 69 May put options are, respectively, 1.63 cents and
0.83 cents.
5. (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)
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33) 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
34) 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.
35) 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
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. For this option to be
considered at-the-money, the strike price must be
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A) $1.60 = €1.00.
B) $1.55 = €1.00.
C) $1.55 × (1 + i$)3/12 = €1.00 × (1 + i€)3/12.
D) none of the options
37) 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) $6,125/(1 + i$)3/12.
C) negative profit, so exercise would not occur.
D) $3,125.
38) 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
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39) 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
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40) 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
41) 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
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42) Which of the following options strategies is consistent with its implications 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
43) 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.
44) 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
45) 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
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46) Assume that the dollar–euro spot rate is $1.28 and the six-month forward rate is
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 $1.25 should sell for in a rational market is
A) 0 cents.
B) 3.47 cents.
C) 3.55 cents.
D) 3 cents.
47) For European options, what is the effect of an increase in St?
A) Decrease the value of calls and puts ceteris paribus
B) Increase the value of calls and puts ceteris paribus
C) Decrease the value of calls, increase the value of puts ceteris paribus
D) Increase the value of calls, decrease the value of puts ceteris paribus
48) For an American call option, A and B in the graph are
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A) time value and intrinsic value.
B) intrinsic value and time value.
C) in-the-money and out-of-the money.
D) none of the options
49) For European options, what is the effect of an increase in the strike price E?
A) Decrease the value of calls and puts ceteris paribus
B) Increase the value of calls and puts ceteris paribus
C) Decrease the value of calls, increase the value of puts ceteris paribus
D) Increase the value of calls, decrease the value of puts ceteris paribus
50) For European currency options written on euro with a strike price in dollars, what is the
effect of an increase in r$ 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
51) For European currency options written on euro with a strike price in dollars, what is the
effect of an increase in r$?
A) Decrease the value of calls and puts ceteris paribus
B) Increase the value of calls and puts ceteris paribus
C) Decrease the value of calls, increase the value of puts ceteris paribus
D) Increase the value of calls, decrease the value of puts ceteris paribus
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52) For European currency options written on euro with a strike price in dollars, what is the
effect of an increase in r€?
A) Decrease the value of calls and puts ceteris paribus
B) Increase the value of calls and puts ceteris paribus
C) Decrease the value of calls, increase the value of puts ceteris paribus
D) Increase the value of calls, decrease the value of puts ceteris paribus
53) For European currency options written on euro with a strike price in dollars, what is the
effect of an increase in the exchange rate S($/€)?
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
54) 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
55) The equation for a European Call Option is a function of which variables?
A. The exchange rate and the exercise price
B. The foreign interest rate and the dollar interest rate
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A) A
B) B
C) Both A and B
D) Neither A or B
56) 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){MISSING IMAGE}
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
57) 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.
{MISSING IMAGE}
A) $9.5238
B) $0.0952
C) $0
D) $3.1746
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58) 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
59) Find the hedge ratio for 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) 5/9
B) 8/13
C) 2/3
D) 3/8
E) none of the options
60) You have written a call option on £10,000 with a strike price of $20,000. The current
exchange rate is $2.00/£1.00 and in the next period the exchange rate can increase to $4.00/£1.00
or decrease to $1.00/€1.00 (i.e. u = 2 and d = 1/u = 0. 5). The current interest rates are i$ = 3%
and are i£ = 2%. Find the hedge ratio and use it to create a position in the underlying asset that
will hedge your option position.
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A) Enter into a short position in a futures contract on £6,666.67
B) Lend the present value of £6,666.67 today at i£ = 2%
C) Enter into a long position in a futures contract on £6,666.67
D) Lending the present value of £6,666.67 today at i£ = 2% or entering into a long
position in a futures contract on £6,666.67 would both work.
61) Draw the tree for a put option on $20,000 with a strike price of £10,000. The current
exchange rate is £1.00 = $2.00 and in one period the dollar value of the pound will either double
or be cut in half. The current interest rates are i$ = 3% and are i£ = 2%.
A) [MISSING IMAGE: , ]
B)
[MISSING IMAGE: , ]
C) both of the options
D) none of the options
62) Draw the tree for a call option on $20,000 with a strike price of £10,000. The current
exchange rate is £1.00 = $2.00 and in one period the dollar value of the pound will either double
or be cut in half. The current interest rates are i$ = 3% and are i£ = 2%.
A) [MISSING IMAGE: , ]
B) [MISSING IMAGE: , ]
C) both of the options
D) none of the options
63) A binomial call option premium is calculated as
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A) C0 = [qCuT + (1 − q)CdT] / (1 + i$)
B) C0 = [qCdT + (1 − q)CuT] / (1 + i$)
C) C0 = [qCuT + (1 − q)CdT] / (1− i$)
D) C0 = [qCdT + (1 − q)CuT] / (1 − i$)
64) The one-step binomial model assumes that at the end of the option period, the call will
have appreciated to SuT = S0u or depreciated to SdT = S0d. How is u calculated?
A) 1/d
B) e^(σt0.5)
C) both 1/d and e^(σt0.5)
D) none of these options
65) Find the dollar value today of a 1-period at-the-money call option on €10,000. The spot
exchange rate is €1.00 = $1.25. In the next period, the euro can increase in dollar value to $2.00
or fall to $1.00. The interest rate in dollars is i$ = 27.50%; the interest rate in euro is i€ = 2%.
A) $3,308.82
B) $0
C) $3,294.12
D) $4,218.75
66) Suppose that you have written a call option on €10,000 with a strike price in dollars.
Suppose further that the hedge ratio is 1/2. Which of the following would be an appropriate hedge
for a short position in this call option?
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A) Buy €5,000 today at today's spot exchange rate.
B) Agree to buy €5,000 at the maturity of the option at the forward exchange rate for the
maturity of the option that prevails today (i.e., go long in a forward contract on €5,000).
C) Buy the present value of €5,000 discounted at i€ for the maturity of the option.
D) Both B and C are correct.
67) With regard to expiration date,
A) futures contracts do not have delivery dates.
B) forward contracts have standardized delivery dates.
C) futures contracts have tailor-made delivery dates that meet the needs of the investor.
D) futures contracts have standardized delivery dates.
68) With regard to trading location,
A) forward contracts are traded competitively on organized exchanges.
B) futures contracts are traded competitively on organized exchanges.
C) futures contracts are traded by bank dealers via a network of telephones and
computerized dealing systems.
D) none of the options
69) With regard to contractual size,
A) forward contracts are characterized by a standardized amount of the underlying asset.
B) futures contracts are tailor-made to the needs of the participant.
C) futures contracts are characterized by a standardized amount of the underlying asset.
D) none of the options
70) With regard to trading costs,
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A) forward contracts involve the bid-ask spread plus the broker’s commission.
B) futures contracts involve the bid-ask spread plus the broker’s commission.
C) futures contracts involve the bid-ask spread plus indirect bank charges via
compensating balance requirements.
D) none of the options
71) Which of the following is correct?
A) The value (in dollars) of a call option on £5,000 with a strike price of $10,000 is
equal to the value (in dollars) of a put option on $10,000 with a strike price of £5,000 only when
the spot exchange rate is $2 = £1.
B) The value (in dollars) of a call option on £5,000 with a strike price of $10,000 is
equal to the value (in dollars) of a put option on $10,000 with a strike price of £5,000.
72) Find the input d1 of the Black-Scholes price of a six-month call option written on
€100,000 with a strike price of $1.25 = €1.00. The current exchange rate is $1.25 = €1.00. The
U.S. risk-free rate is 5% over the period and the euro-zone risk-free rate is 4%. The volatility of
the underlying asset is 10.7 percent.
A) d1 = 0.1039
B) d1 = 2.9871
C) d1 = 0.0283
D) none of the options
73) Find the input d1 of the Black-Scholes price of a six-month call option on Japanese yen.
The strike price is $1 = ¥100. The current spot rate is $1 = ¥100. The volatility is 25 percent per
annum; i$ = 5.5% and i¥ = 6%.
Version 1 26
A) d1 = 0.074246
B) d1 = 0.005982
C) d1 = $0.006137/¥
D) none of the options
74) The Black-Scholes option pricing formula
A) is used widely in practice, especially by international banks in trading OTC options.
B) is not widely used outside of the academic world.
C) works well enough, but is not used in the real world because no one has the time to
flog their calculator for five minutes on the trading floor.
D) none of the options
75) Find the Black-Scholes price of a six-month call option written on €100,000 with a strike
price of $1.25 = €1.00. The current exchange rate is $1.25 = €1.00. The U.S. risk-free rate is 5
percent over the period and the euro-zone risk-free rate is 4 percent. The volatility of the
underlying asset is 10.7 percent.
A) Ce = $0.0400
B) Ce = $0.0998
C) Ce = $1.6331
D) none of the options
76) Use the European option pricing formula to find the value of a six-month call option on
Japanese yen. The strike price is $1 = ¥100. The spot rate is $1 = ¥100. The volatility is 25
percent per annum; i$ = 5.5% and i¥ = 6%.
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A) $0.005395/¥100
B) $0.005982/¥
C) $0.0672/100
D) none of the options
77) Empirical tests of the Black-Scholes option pricing formula
A) shows that binomial option pricing is used widely in practice, especially by
international banks in trading OTC options.
B) works poorly for pricing American currency options that are at-the-money.
C) work well for pricing in-the-money calls and puts.
D) works well for pricing American currency options that are at-the-money or out-of-
the-money, but does not do well in pricing in-the-money calls and puts.
78) Empirical tests of the Black-Scholes option pricing formula
A) have faced difficulties due to nonsynchronous data.
B) suggest that when using simultaneous price data and incorporating transaction costs
they conclude that the PHLX American currency options are efficiently priced.
C) suggest that the European option-pricing model works well for pricing American
currency options that are at- or out-of-the money, but does not do well in pricing in-the-money
calls and puts.
D) all of the options
79) Which of the following statements is true regarding the European option-pricing model?
Version 1 28
A) was developed by Biger and Hull (1983)
B) was developed by Garman, Kohlhage and Grabbe (1983).
C) the evolution of the model can be traced back to European option-pricing models
developed by Merton (1973) and Black (1976)
D) all of the options are true.
80) Consider an option to buy £10,000 for €12,500. In the next period, if the pound
appreciates against the dollar by 37.5 percent then the euro will appreciate against the dollar by
ten percent. On the other hand, the euro could depreciate against the pound by 20 percent.
Big hint: don't round, keep exchange rates out to at least 4 decimal places.
Spot Rates
Risk-free Rates
S0($/€)
$1.60 = €1.00
i$
3.00%
S0($/£)
$2.00 = £1.00
i€
4.00%
S0(€/£)
€1.25 = £1.00
i£
4.00%
Calculate the current €/£ spot exchange rate.
81) Consider an option to buy £10,000 for €12,500. In the next period, if the pound
appreciates against the dollar by 37.5 percent then the euro will appreciate against the dollar by
ten percent. On the other hand, the euro could depreciate against the pound by 20 percent.
Big hint: don't round, keep exchange rates out to at least 4 decimal places.
Spot Rates
Risk-free Rates
S0($/€)
$1.60 = €1.00
i$
3.00%
S0($/£)
$2.00 = £1.00
i€
4.00%
Version 1 29
S0(€/£)
€1.25 = £1.00
i£
4.00%
Find the risk neutral probability of an "up" move.
82) Consider an option to buy £10,000 for €12,500. In the next period, if the pound
appreciates against the dollar by 37.5 percent then the euro will appreciate against the dollar by
ten percent. On the other hand, the euro could depreciate against the pound by 20 percent.
Big hint: don't round, keep exchange rates out to at least 4 decimal places.
Spot Rates
Risk-free Rates
S0($/€)
$1.60 = €1.00
i$
3.00%
S0($/£)
$2.00 = £1.00
i€
4.00%
S0(€/£)
€1.25 = £1.00
i£
4.00%
USING RISK NEUTRAL VALUATION (i.e., the binomial option pricing model) find the value
of the call (in euro).
83) Consider an option to buy £10,000 for €12,500. In the next period, if the pound
appreciates against the dollar by 37.5 percent then the euro will appreciate against the dollar by
ten percent. On the other hand, the euro could depreciate against the pound by 20 percent.
Big hint: don't round, keep exchange rates out to at least 4 decimal places.
Spot Rates
Risk-free Rates
S0($/€)
$1.60 = €1.00
i$
3.00%
Version 1 30
S0($/£)
$2.00 = £1.00
i€
4.00%
S0(€/£)
€1.25 = £1.00
i£
4.00%
Calculate the hedge ratio.
84) Consider an option to buy £10,000 for €12,500. In the next period, if the pound
appreciates against the dollar by 37.5 percent then the euro will appreciate against the dollar by
ten percent. On the other hand, the euro could depreciate against the pound by 20 percent.
Big hint: don't round, keep exchange rates out to at least 4 decimal places.
Spot Rates
Risk-free Rates
S0($/€)
$1.60 = €1.00
i$
3.00%
S0($/£)
$2.00 = £1.00
i€
4.00%
S0(€/£)
€1.25 = £1.00
i£
4.00%
State the composition of the replicating portfolio; your answer should contain "trading orders" of
what to buy and what to sell at time zero.
85) Consider an option to buy £10,000 for €12,500. In the next period, if the pound
appreciates against the dollar by 37.5 percent then the euro will appreciate against the dollar by
ten percent. On the other hand, the euro could depreciate against the pound by 20 percent.
Big hint: don't round, keep exchange rates out to at least 4 decimal places.
Spot Rates
Risk-free Rates
Version 1 31
S0($/€)
$1.60 = €1.00
i$
3.00%
S0($/£)
$2.00 = £1.00
i€
4.00%
S0(€/£)
€1.25 = £1.00
i£
4.00%
Find the value today of your replicating today’s portfolio in euro.
86) Consider an option to buy £10,000 for €12,500. In the next period, if the pound
appreciates against the dollar by 37.5 percent then the euro will appreciate against the dollar by
ten percent. On the other hand, the euro could depreciate against the pound by 20 percent.
Big hint: don't round, keep exchange rates out to at least 4 decimal places.
Spot Rates
Risk-free Rates
S0($/€)
$1.60 = €1.00
i$
3.00%
S0($/£)
$2.00 = £1.00
i€
4.00%
S0(€/£)
€1.25 = £1.00
i£
4.00%
If the call finishes out-of-the-money what is your replicating portfolio cash flow?
87) Consider an option to buy £10,000 for €12,500. In the next period, if the pound
appreciates against the dollar by 37.5 percent then the euro will appreciate against the dollar by
ten percent. On the other hand, the euro could depreciate against the pound by 20 percent.
Big hint: don't round, keep exchange rates out to at least 4 decimal places.
Version 1 32
Spot Rates
Risk-free Rates
S0($/€)
$1.60 = €1.00
i$
3.00%
S0($/£)
$2.00 = £1.00
i€
4.00%
S0(€/£)
€1.25 = £1.00
i£
4.00%
If the call finishes in-the-money what is your replicating portfolio cash flow?
88) Consider an option to buy £10,000 for €12,500. In the next period, if the pound
appreciates against the dollar by 37.5 percent then the euro will appreciate against the dollar by
ten percent. On the other hand, the euro could depreciate against the pound by 20 percent.
Big hint: don't round, keep exchange rates out to at least 4 decimal places.
Spot Rates
Risk-free Rates
S0($/€)
$1.60 = €1.00
i$
3.00%
S0($/£)
$2.00 = £1.00
i€
4.00%
S0(€/£)
€1.25 = £1.00
i£
4.00%
Find the value of the call.
Version 1 33
89) Consider an option to buy €12,500 for £10,000. In the next period, the euro can
strengthen against the pound by 25 percent (i.e., each euro will buy 25 percent more pounds) or
weaken by 20 percent.
Big hint: don't round, keep exchange rates out to at least 4 decimal places.
Spot Rates
Risk-free Rates
S0($/€)
$1.60 = €1.00
i$
3.00%
S0($/£)
$2.00 = £1.00
i€
4.00%
S0(€/£)
€1.25 = £1.00
i£
4.00%
Calculate the current €/£ spot exchange rate.
90) Consider an option to buy €12,500 for £10,000. In the next period, the euro can
strengthen against the pound by 25 percent (i.e., each euro will buy 25 percent more pounds) or
weaken by 20 percent.
Big hint: don't round, keep exchange rates out to at least 4 decimal places.
Spot Rates
Risk-free Rates
S0($/€)
$1.60 = €1.00
i$
3.00%
S0($/£)
$2.00 = £1.00
i€
4.00%
S0(€/£)
€1.25 = £1.00
i£
4.00%
Find the risk neutral probability of an "up" move.
Version 1 34
91) Consider an option to buy €12,500 for £10,000. In the next period, the euro can
strengthen against the pound by 25 percent (i.e., each euro will buy 25 percent more pounds) or
weaken by 20 percent.
Big hint: don't round, keep exchange rates out to at least 4 decimal places.
Spot Rates
Risk-free Rates
S0($/€)
$1.60 = €1.00
i$
3.00%
S0($/£)
$2.00 = £1.00
i€
4.00%
S0(€/£)
€1.25 = £1.00
i£
4.00%
USING RISK NEUTRAL VALUATION, find the value of the call (in pounds)
92) Consider an option to buy €12,500 for £10,000. In the next period, the euro can
strengthen against the pound by 25 percent (i.e., each euro will buy 25 percent more pounds) or
weaken by 20 percent.
Big hint: don't round, keep exchange rates out to at least 4 decimal places.
Spot Rates
Risk-free Rates
S0($/€)
$1.60 = €1.00
i$
3.00%
S0($/£)
$2.00 = £1.00
i€
4.00%
S0(€/£)
€1.25 = £1.00
i£
4.00%
Calculate the hedge ratio.
Version 1 35
93) Consider an option to buy €12,500 for £10,000. In the next period, the euro can
strengthen against the pound by 25 percent (i.e., each euro will buy 25 percent more pounds) or
weaken by 20 percent.
Big hint: don't round, keep exchange rates out to at least 4 decimal places.
Spot Rates
Risk-free Rates
S0($/€)
$1.60 = €1.00
i$
3.00%
S0($/£)
$2.00 = £1.00
i€
4.00%
S0(€/£)
€1.25 = £1.00
i£
4.00%
State the composition of the replicating portfolio; your answer should contain "trading orders" of
what to buy and what to sell at time zero.
94) Consider an option to buy €12,500 for £10,000. In the next period, the euro can
strengthen against the pound by 25 percent (i.e., each euro will buy 25 percent more pounds) or
weaken by 20 percent.
Big hint: don't round, keep exchange rates out to at least 4 decimal places.
Spot Rates
Risk-free Rates
S0($/€)
$1.60 = €1.00
i$
3.00%
S0($/£)
$2.00 = £1.00
i€
4.00%
S0(€/£)
€1.25 = £1.00
i£
4.00%
Version 1 36
Find the cost today of your hedge portfolio in pounds.
95) Consider an option to buy €12,500 for £10,000. In the next period, the euro can
strengthen against the pound by 25 percent (i.e., each euro will buy 25 percent more pounds) or
weaken by 20 percent.
Big hint: don't round, keep exchange rates out to at least 4 decimal places.
Spot Rates
Risk-free Rates
S0($/€)
$1.60 = €1.00
i$
3.00%
S0($/£)
$2.00 = £1.00
i€
4.00%
S0(€/£)
€1.25 = £1.00
i£
4.00%
If the call finishes out-of-the-money what is your portfolio cash flow?
96) Consider an option to buy €12,500 for £10,000. In the next period, the euro can
strengthen against the pound by 25 percent (i.e., each euro will buy 25 percent more pounds) or
weaken by 20 percent.
Big hint: don't round, keep exchange rates out to at least 4 decimal places.
Spot Rates
Risk-free Rates
S0($/€)
$1.60 = €1.00
i$
3.00%
S0($/£)
$2.00 = £1.00
i€
4.00%
Version 1 37
S0(€/£)
€1.25 = £1.00
i£
4.00%
If the call finishes in-the-money what is your portfolio cash flow?
97) Consider an option to buy €12,500 for £10,000. In the next period, the euro can
strengthen against the pound by 25 percent (i.e., each euro will buy 25 percent more pounds) or
weaken by 20 percent.
Big hint: don't round, keep exchange rates out to at least 4 decimal places.
Spot Rates
Risk-free Rates
S0($/€)
$1.60 = €1.00
i$
3.00%
S0($/£)
$2.00 = £1.00
i€
4.00%
S0(€/£)
€1.25 = £1.00
i£
4.00%
Find the value of the call.
98) Find the dollar value today of a 1-period at-the-money call option on ¥300,000. The spot
exchange rate is ¥100 = $1.00. In the next period, the yen can increase in dollar value by 15
percent or decrease by 15 percent. The risk-free rate in dollars is i$ = 5%; The risk-free rate in
yen is i¥ = 1%.
Version 1 38
99) A put option on $15,000 with a strike price of €0.666/$ is the same thing as a call option
on €10,000 with a strike price of $1.50/€.
⊚ true
⊚ false
Version 1 39
Answer Key
Test name: chapter 7
Version 1 40
Version 1 41
