7Student: ___________________________________________________________________________ 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. True False 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. Bwants 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. both b and c 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. Ca 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. both b and c 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. both a and b E. both a and c 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 above 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. both a and b 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 €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. $1.1840 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 above 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 above 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. 8011/ ¥100.8057/¥100. Futures contracts are available on €10.7985/¥100. Go long in the spot market. Which equation is used to define the futures price? A. $3. $159.425. Hedge Ratio C. go short in the futures contract. (The contractual size of one CME Yen contract is ¥12. The next three days' settlement prices are $0. If you have a long position in one futures contract. IRP B. D. Go long in the spot market.7996/¥100. C. C. What steps would assure an arbitrage profit? A. the changes in the margin account from daily marking-to-market. Suppose you observe the following 1-year interest rates. Risk Neutral Valuation 17. and $0. D.000). C. What paradigm is used to define the futures price? A. Your margin account currently has a balance of $2.42 None of the above 18. will result in the balance of the margin account after the third day to be A. 15. 16. go long in the futures contract. Go short in the spot market.10 $439. $1. C.000. $0. $1.425. B. go short in the futures contract. How much risk-free arbitrage profit could you make on 1 contract at maturity from this mispricing? A. Black Scholes D. .14.000.675. B. Go short in the spot market. B. $2. Suppose the futures price is below the price predicted by IRP.22 $153. D. D.500. B. Today's settlement price on a Chicago Mercantile Exchange (CME) Yen futures contract is $0.000. go long in the futures contract. spot exchange rates and futures prices. none of the above 24. tends to be greatest for the near-term contracts. B. D.875. you should A. and going long in the domestic . $1. D.52/€ B. D going long in the futures contract. Open interest in currency futures contracts A. Which equation is used to define the futures price? A. buy call options on the euro. tends to be greatest for the longer-term contracts.going long in the futures contract. the total number of people indicating interest in selling the contracts in the near future. C. C.going short in the futures contract. $1. buy put options on the euro. and going short in the foreign currency in the spot market. borrowing in the domestic currency.19.500. If a currency futures contract (direct quote) is priced below the price implied by Interest Rate Parity (IRP).55/€ C. currency. D. If you think that the dollar is going to appreciate against the euro. C.58/€ D. borrowing in the foreign currency. 20.55/€. C. borrowing in the domestic currency. the total number of people indicating interest in buying or selling the contracts in the near future. E. The "open interest" shown in currency futures quotations is A. sell call options on the euro. C. B. B. None of the above . the total number of people indicating interest in buying the contracts in the near future. 23. going short in the futures contract. D. From the perspective of the writer of a put option written on €62. 21. typically decreases with the term to maturity of most futures contracts. B. arbitrageurs could take advantage of the mispricing by simultaneously A. investing the proceeds at the local rate of interest. at what exchange rate do you start to lose money? A. If the strike price is $1. and the option premium is $1. the total number of long or short contracts outstanding for the particular delivery month. and going long in the foreign currency in the spot market. and going long in the foreign currency in the spot market. both a and c 22. lending in the domestic currency. $1. B. but not the obligation. European options' exercise price is set at the average . An investor believes that the price of a stock. (i). American options can be exercised prior to maturity.sell (write) a put option A. much larger than that of organized-exchange currency option trading. D American options have a fixed exercise price.25. will increase in the next 60 days. C. C. say IBM's shares. European options tend to be worth more than American options. (ii). price of the underlying asset during the life of the option.buy a put option (iii) . and (v) D. to buy (call) or sell . B. to buy (put) or sell . 9. If the investor is correct. because the exchanges are only repackaging OTC options for their customers. An "option" is Aa contract giving the seller (writer) of the option the right. (i). but not the obligation. 6. and (iv) C. European options can only be exercised at maturity.buy the stock and hold it for 60 days (ii) . (iv). to buy (call) or sell . 2. B. Ba contract giving the owner (buyer) of the option the right. (i). B. (ii). one is traded in Europe and one in traded in the United States. much smaller than that of organized-exchange currency option trading. D.buy a call option (v) . mature every month. ceteris paribus. A European option is different from an American option in that A. (sell) a given quantity of an asset at a specified price at some time in the future. mature every month. (put) a given quantity of an asset at a specified price at some time in the future. and 3 years. 27. none of the above . (call) a given quantity of an asset at a specified price at some time in the future. have original maturities of 3. but not the obligation.sell (write) a call option (iv) . Most exchange traded currency options A. but not the obligation. 26. with daily resettlement. C. and (iii) B. which combination of the following investment strategies will show a profit in all the choices? (i) . Da contract giving the owner (buyer) of the option the right. without daily resettlement. (put) a given quantity of an asset at a specified price at some time in the future. D. have original maturities of 1. The volume of OTC currency options trading is A. and 12 months. larger. 29. Ca contract giving the owner (buyer) of the option the right. to buy (put) or sell . (ii) and (iii) 28. D.55 = €1. C. (iv) . a long futures position for the put buyer or call writer. 1. none of the above 32. none of the above . a futures contract on the foreign currency. Why would something like that exist? A. a long futures position for the call buyer or put writer. For some assets.30.The 68 May put option has a lower time value (price) than the 69 May put option. a short futures position for the call buyer or put writer.55 × (1 + i )3/12 = €1.The time values of the 68 May and 69 May put options are respectively . a short futures position for the call buyer or put buyer. With currency futures options the underlying asset is A. the spot price and the put premium are inversely related. and for some users an option contract on a future is more tax efficient. (v) . (ii). (i). Transactions costs and liquidity. A. and (iii) B.500. 33.30 cents and . B. Consider a three-month American call option on €62.50 cents. (iii) and (iv) D.55 = €1. B. All of the above 34.00. D. D. (iv) and (v) 31. (ii) . The current spot exchange rate is $1.60 = €1. (iii). B.00 and the three-month forward rate is $1. (iii) .00 × (1 + i )3/12 $ € D. For this option to be considered at-the-money.00 C. In the CURRENCY TRADING section of The Wall Street Journal. C. C. A currency futures option amounts to a derivative on a derivative. the strike price and the put premium are inversely related. the strike price must be A. the futures contract can have lower transactions costs and greater liquidity than the underlying asset. respectively. Tax consequences matter as well. $1.The time values of the 68 May and 69 May put options are. the following appeared under the heading OPTIONS: Which combination of the following statements are true? (i) .If everything else is kept constant. $1. Exercise of a currency futures option results in A.60 = €1. and (iv) C. (ii). $1.If everything else is kept constant.00 B. foreign currency.83 cents. a call or put option written on foreign currency.63 cents and 0. 00 and the three-month forward rate is $1.50.00 and an option premium of $3. $1. at what exchange rate will you break-even? A.000 to buy this call. negative profit. C = $1.125. A = -€3. $6.125.00. Consider a three-month American call option on €62. $3. Consider the graph of a call option shown at right.55 B.60 = €1.55 C. Consider a three-month American call option on €62.750 (or -€.00 C. If you pay an option premium of $5.55 = €1. B = $1.55 = €1.500 with a strike price of $1. B = $1.50 = €1.125 (or -$.50 = €1.00 D.500 with a strike price of $1. Immediate exercise of this option will generate a profit of A.00 and the three-month forward rate is $1. C = $1.60 = €1. A = -$.68 = €1.00 B.00.00. What are the values of A.06 depending on your scale). $1. The current spot exchange rate is $1. C = $1. $1. B. The current spot exchange rate is $1.50 = €1.62 = €1. The option is a three-month American call option on €62. B. respectively? A. C. so exercise would not occur. none of the above .55.125. $6.00.50.60 D. D.500 with a strike price of $1. A = -$3.00 37.05. and C.05 depending on your scale). B = $1.50 = €1.58 = €1. 36.35. $1.125/(1 + i$)3/12. D. the three-month U.500 with a strike price of $1.time value D.125/1. European options can be exercised early.50 = €1. $3. D. Option premium = intrinsic value . dollar interest rate is 2%. $0. $0. Time value = intrinsic value + option premium B.125? A. Intrinsic value = option premium + time value C.00 and an option premium of $3. Selling calls and selling puts B. The current spot exchange rate is $1. should be no larger than their speculative value. Which of the following is correct? A. American options can be exercised early.73 C.00. Buying calls and buying puts C.00.05 × 62. American call and put premiums A. B. Option premium = intrinsic value + time value 43. All of the above .38. 42. C. Which of the follow options strategies are consistent in their belief about the future behavior of the underlying asset price? A. should be at no larger than their moneyness.55 = €1. What is the least that this option should sell for? A.500 = $3.500 with a strike price of $1.00 D. C. should be exactly equal to their time value. B. none of the above 40.063. None of the above 41. A B C D 39. Which of the lines is a graph of the profit at maturity of writing a call option on €62. C. should be at least as large as their intrinsic value. Buying calls and selling puts D. Asian options can be exercised early. Consider a three-month American call option on €62.S. D.20 = €1.02 = $3. Which of the following is correct? A.125 B. B. Decrease the value of calls. increase the value of puts ceteris paribus D. Decrease the value of calls.25 should sell for in a rational market is A. decrease the value of puts ceteris paribus . 3. D. For European options.44. 45. Decrease the value of calls and puts ceteris paribus B. increase the value of puts ceteris paribus D. decrease the value of puts ceteris paribus 48. Increase the value of calls and puts ceteris paribus C. none of the above 47. B. Decrease the value of calls. 3 cents. For European currency options written on euro with a strike price in dollars. what of the effect of an increase in r$? A. time value and intrinsic value. Increase the value of calls. what of the effect of an increase in r$ relative to r€? A. in-the-money and out-of-the money. For European currency options written on euro with a strike price in dollars. Decrease the value of calls and puts ceteris paribus B. Increase the value of calls. Decrease the value of calls and puts ceteris paribus B. B.47 cents. increase the value of puts ceteris paribus D. Increase the value of calls. 0 cents. The minimum price that a six-month American call option with a striking price of $1. C. Decrease the value of calls and puts ceteris paribus B.S. what of the effect of an increase in St? A. what of the effect of an increase in the strike price E? A. Increase the value of calls. Increase the value of calls and puts ceteris paribus C. Assume that the dollar-euro spot rate is $1. Increase the value of calls and puts ceteris paribus C. For an American call option. Decrease the value of calls. intrinsic value and time value. increase the value of puts ceteris paribus D. A and B in the graph are A. 3. decrease the value of puts ceteris paribus 49. dollar rate is 5% and the Eurodollar rate is 4%.55 cents.28 and the six-month forward rate is The six-month U. D. C. decrease the value of puts ceteris paribus 46. For European options. Increase the value of calls and puts ceteris paribus C. 50. Decrease the value of calls. Increase the value of calls and puts ceteris paribus C. $9. certain amount of the underlying asset. For European currency options written on euro with a strike price in dollars. Increase the value of calls.00 = €1. Decrease the value of calls. what of the effect of an increase in the exchange rate S(€/$)? A.00).85 = €1. Increase the value of calls and puts ceteris paribus C. C Is related to the number of options that an investor can write without unlimited loss while holding a . $1.e.0952 $0 $3. risk-free rate is 5% over the period. A. All of the above 54. The risk-neutral probability of dollar depreciation is 2/3 and the risk-neutral probability of the dollar strengthening is 1/3. Find the value of a call option written on €100 with a strike price of $1. decrease the value of puts ceteris paribus 52.00.15 = €1. Decrease the value of calls and puts ceteris paribus B. The U.5238 $0. decrease the value of puts ceteris paribus 51. decrease the value of puts ceteris paribus 53. Decrease the value of calls and puts ceteris paribus B.S. Decrease the value of calls and puts ceteris paribus B.00 or $0. investor must write (buy) to have a risk-free offsetting investment that will result in the investor perfectly hedging the option.1746 . For European currency options written on euro with a strike price in dollars. Increase the value of calls. Decrease the value of calls. increase the value of puts ceteris paribus D. D. what of the effect of an increase in the exchange rate S($/€)? A. Increase the value of calls and puts ceteris paribus C. In one period there are two possibilities: the exchange rate will move up by 15% or down by 15% (i. B. For European currency options written on euro with a strike price in dollars. C. B. increase the value of puts ceteris paribus D. D. The hedge ratio AIs the size of the long (short) position the investor must have in the underlying asset per option the . increase the value of puts ceteris paribus D. Increase the value of calls. what of the effect of an increase r€? A. 500. u = 1. You have written a call option on £10.000 with a strike price of €12. The current exchange rate is $2. Find the hedge ratio and use it to create a position in the underlying asset that will hedge your option position.6 and d = 1/u = 0.666.00 (i.625). The current interest rates are i$ = 3% and are i£ = 2%.6 and d = 1/u = 0.00/ €1. €3.373 D. €2.625). 3/8 E.00 and in the next period the exchange rate can increase to $4. The current interest rates are i€ = 3% and are i£ = 4%.243 56. A.00 (i.00/£1. €3.000 with a strike price of €12.00 or decrease to $1. 5/9 B.67 E. Find the hedge ratio for a call option on £10.666. Both c and d would work F.67 today at i£ = 2% D.40/£ or decrease to €0.275 B.00 (i.00 and in the next period the exchange rate can increase to €2.000. Choose the answer closest to yours. u = 1. None of the above . 5).e.000 with a strike price of $20. Lend the present value of £6. Choose the answer closest to yours.9375/€1.000 today at $2.00 B. Use the binomial option pricing model to find the value of a call option on £10.666.55.40/£ or decrease to €0. 2/3 D. None of the above 57. Buy £10.500 C.500.00 and in the next period the exchange rate can increase to €2.50/£1. A. A. The current exchange rate is €1.00/£1.e. Enter into a long position in a futures contract on £6.9375/€1.e. 8/13 C.50/£1.00/£1. Enter into a short position in a futures contract on £6.67 C. €3. u = 2 and d = 1/u = 0. The current exchange rate is €1. The current interest rates are i€ = 3% and are i£ = 4%. B. The current exchange rate is £1.000 with a strike price of £10.00 = $2. None of the above .00 and in one period the dollar value of the pound will either double or be cut in half. The current interest rates are i$ = 3% and are i£ = 2%. A.000.58. Draw the tree for a put option on $20. C. 5% (i. 8/13 C. Find the hedge ratio for a put option on $15. Find the hedge ratio for a put option on €10. -5/13 D.50/€) can increase by 60% or decrease by 37. -15/49 B. The current interest rates are i$ = 3% and are i£ = 2%. In one period the exchange rate (currently S($/€) = $1.e.50/€) can increase by 60% or decrease by 37.e. 15/49 .59.000.6 and d = 0. None of the above 60. u = 1. A. A.625). C. A. u = 1. The current exchange rate is £1.000.00 = $2. Draw the tree for a call option on $20.5% (i. 15/49 61.625). 5/13 C.000.000 with a strike price of £10.6 and d = 0.000 with a strike price of €10.000 with a strike price of $15. B. -15/49 B. 3/2 D. In one period the exchange rate (currently S($/€) = $1.00 and in one period the dollar value of the pound will either double or be cut in half. 6 and d = 0. $12.00.00.62.000 today at today's spot exchange rate. $0 C.525. Which of the following would be an appropriate hedge for a short position in this call option? A. risk-free rate is 5% over the period and the U.67 B. €1.40 C. u = 1. Find the value of a one-year put option on $15.75 63. None of the above 66. $20. £6.698.50/€) can increase by 60% or decrease by 37.000 with a strike price of $15. C Agree to buy €5. u = 2 and d = ½). $3.e.218.000 today at today's spot exchange rate. option that prevails today (i. Buy €10.S. the euro can increase in dollar value to $2. None of the above .5% (i. $4. $3. $4. €2.294. $4.000.60 D.00 = £1. In the next period.82 B. $3.000.992. The U. None of the above 64.52 B. is i$ = 4% and the current one-year interest rate in the euro zone is i€ = 4%. In one year the exchange rate (currently S0($/€) = $1.000 at the maturity of the option at the forward exchange rate for the maturity of the . The current one-year interest rate in the U. Buy €5. Suppose further that the hedge ratio is ½.666. A. F.000 with a strike price in dollars.000 with a strike price of €10.50%. u = 1.K.S.000).e.21 C.000 E. Find the dollar value today of a 1-period at-the-money call option on €10.00 = £1. None of the above 65.00 or fall to $1.000 discounted at i€ for the maturity of the option.e.328..25. Both c and d would work.328. The spot exchange rate is €1.e. is i$ = 4% and the current one-year interest rate in the euro zone is i€ = 4%.S.218. $3. Consider a 1-year call option written on £10.525. A. If you write 1 call option.000.40 C. D. go long in a forward contract on €5.6 and d = 0.52 B. what is the value today (in dollars) of the hedge portfolio? A.94 E.94 E.349. B.308. the pound will either double in dollar terms or fall by half (i.12 D. the interest rate in euro is i€ = 2%.5% (i.625). A. Suppose that you have written a call option on €10. £6. The interest rate in dollars is i$ = 27.000 with an exercise price of $2. E.41 D.992.50/€) can increase by 60% or decrease by 37. In one year the exchange rate (currently S0($/€) = $1. risk-free rate is also 5%.60 D.218. The current exchange rate is $2.00 = $1. Buy the present value of €5. €2. The current one-year interest rate in the U. Find the value of a one-year call option on €10. In the next year.00.625). €1. S.00. The strike price is $1 = ¥100.006137/¥ D. The U. 69. dollars) of a put option on $10. Ce = $1. Ce = $0.00.5% and r¥ = 6%. are not widely used outside of the academic world. none of the above 73. A.7 percent. dollars) of a put option on $10. Ce = $0. Use the European option pricing formula to find the value of a six-month call option on Japanese yen. d1 = 0.7 percent. $6. D. The volatility is 25 percent per annum.000 with a strike price of £5. the pound will either double in dollar terms or fall by half (i. 0.000 is equal to the value (in .00 = €1.000 with a strike price of $10. especially by international banks in trading OTC options. for five minutes on the trading floor. Value a 1-year call option written on £10. Find the input d1 of the Black-Scholes price of a six-month call option on Japanese yen. $0.074246 B. None of the above . The U. The volatility is 25 percent per annum.5% and r¥ = 6%.e. C work well enough. B. d1 = 0. risk-free rate is 5% and the U. The current exchange rate is $1.63577 B.005982 C.000. The strike price is $1 = ¥100. d1 = -0. A.005395 B.00 = £1. D.000 with a strike price of $10. A.00. Which of the following is correct? AThe value (in dollars) of a call option on £5.K.00.9871 C. risk-free rate is 5% over the period and the euro-zone risk-free rate is 4%.00 = €1.00 = £1.000 only when the spot exchange rate is $2 = £1. but are not used in the real world because no one has the time to flog their calculator . Hint: H = ⅔.25 = €1.00. are used widely in practice.006137/¥ D.103915 B. d1 = 2. None of the above 71.005982 C. B The value (in dollars) of a call option on £5.000 is equal to the value (in .000 with a strike price of $1.67. d1 = $0.21 B.0998 C. risk-free rate is also 5%.000 with a strike price of £5. u = 2 and d = ½).S. The Black-Scholes option pricing formulae A. C. None of the above 68. Find the input d of the Black-Scholes price of a six-month call option written on €100. risk-free rate is 5% over the period and the euro-zone risk-free rate is 4%. The current exchange rate is $1. A. r$ = 5. r$ = 5.6331 D.000 with a strike 1 price of $1.00. A. In the next year. 0. none of the above 70. The U.25 = €1. Find the Black-Scholes price of a six-month call option written on €100. The volatility of the underlying asset is 10. The spot exchange rate is $2. d1 = 0. The volatility of the underlying asset is 10. none of the above 72.S.000 with an exercise price of $2.349.0283 D. The same call from the last question (a 1-period call option on €10. works well for pricing American currency options that are at-the-money or out-of-the-money.00. the PHLX American currency options are efficiently priced. all of the above 76.500 with a strike price of €10. both b and c 75. Your answer is worth zero points if it does not include currency symbols (€)! . shows that binomial option pricing is used widely in practice. D. Empirical tests of the Black-Scholes option pricing formula A.00 = $1.or out-of-the money. In the next period.74. Hint: you can't recycle your risk neutral probability from the call option. Csuggest that the European option-pricing model works well for pricing American currency options that .25. As before. but does not do well in pricing in-the-money calls and puts.000 with a strike price of $12. C. Empirical tests of the Black-Scholes option pricing formula A.50%. The interest rate in dollars is i$ = 27. have faced difficulties due to nonsynchronous data. the euro can increase in dollar value to $2.000. B suggest that when using simultaneous price data and incorporating transaction costs they conclude that . does not do well in pricing in-the-money calls and puts. could also be thought of as a 1-period at-the-money put option on $12. Using your results from parts a and b find the value of this put option (in €). 77. are at. the interest rate in euro is i€ = 2%.500. 78. B. the spot exchange rate is €1. D. especially by international banks in trading OTC options.00 or fall to $1. Find the risk-neutral probability of an "up" move FOR YOUR TREE. Draw the binomial tree for this putoption. Your answer is worth zero points if it does not include currency symbols ($. if the pound appreciates against the dollar by 37. Big hint: don't round. Verify that the dollar value of your put option equals the dollar value of your call. In the next period.79.5 percent then the euro will appreciate against the dollar by ten percent. 82. On the other hand.500. Calculate the current €/£ spot exchange rate. 81. Find the risk neutral probability of an "up" move.€)! Consider an option to buy £10. the euro could depreciate against the pound by 20 percent.000 for €12. 83. .e. USING RISK NEUTRAL VALUATION (i. keep exchange rates out to at least 4 decimal places. the binomial option pricing model) find the value of the call (in euro). Draw the binomial tree for this option. 80. State the composition of the replicating portfolio. 85. 87.84. Use your results from the last three questions to verify your earlier result for the value of the call. If the call finishes in-the-money what is your replicating portfolio cash flow? 89. Calculate the hedge ratio. . your answer should contain "trading orders" of what to buy and what to sell at time zero. 86. If the call finishes out-of-the-money what is your replicating portfolio cash flow? 88. Find the value today of your replicating today portfolio in euro. the euro can strengthen against the pound by 25% (i. Find the risk neutral probability of an "up" move.500 for £10. keep exchange rates out to at least 4 decimal places. Draw the tree. Calculate the hedge ratio. Calculate the current €/£ spot exchange rate. 93. 90. 94.000. USING RISK NEUTRAL VALUATION find the value of the call (in pounds). 91. In the next period.e. 92. . each euro will buy 25% more pounds) or weaken by 20%. Big hint: don't round.Consider an option to buy €12. 100. 97.95. If the call finishes in-the-money what is your portfolio cash flow? 99. Find the cost today of your hedge portfolio in pounds. In the next period. The risk free rate in yen is i¥ = 1%. Use your results from the last three questions to verify your earlier result for the value of the call. the yen can increase in dollar value by 15 percent or decrease by 15 percent. your answer should contain "trading orders" of what to buy and what to sell at time zero. The risk free rate in dollars is i$ = 5%. If the call finishes out-of-the-money what is your portfolio cash flow? 98.000. . 96. State the composition of the replicating portfolio.00.Find the dollar value today of a 1-period at-the-money call option on ¥300. The spot exchange rate is ¥100 = $1. they are both "marked-to-market" daily. delivery of the underlying asset is seldom made in futures contracts. In reference to the futures market. organized exchanges.500. delivery of the underlying asset is seldom made in either contract—they are typically cash settled at maturity. D.00. You have lost $2.00. B. Ca futures contract is negotiated by open outcry between floor brokers or traders and is traded on . we can say that A. is an example of a put option. while forward contract is tailor-made by an international bank for its clients and is traded OTC. You have neither made nor lost money.Chapter 07 #4 Topic: Futures Contracts: Some Preliminaries 5. is an example of a call option. yet. D.7 Key 1. You have made $2. Comparing "forward" and "futures" exchange contracts. 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.Chapter 07 #3 Topic: Futures Contracts: Some Preliminaries 4. both a and b E. a "speculator" A. Bwants to avoid price variation by locking in a purchase price of the underlying asset through a long .50 per €. A put option on $15. B. Depends on your margin balance. How much have you made/lost? A. delivery of the underlying asset is usually made in forward contracts. D.000 with a strike price of €10.Chapter 07 #5 Topic: Futures Contracts: Some Preliminaries 6. both b and c Eun . attempts to profit from a change in the futures price.Chapter 07 #6 Topic: Futures Contracts: Some Preliminaries . is an example of a forward contract. both b and c Eun . C.000 with September delivery A. B. is an example of a futures contract. C.46. Yesterday. TRUE Eun .000 is the same thing as a call option on €10. D. Comparing "forward" and "futures" exchange contracts. Eun . Eun .Chapter 07 #2 Topic: Futures Contracts: Some Preliminaries 3. C.000 with a strike price of $15. we can say that A. position in the futures contract or a sales price through a short position in the futures contract. both a and c Eun . stands ready to buy or sell contracts in unlimited quantity.500.Chapter 07 #1 Topic: Basic Option-Pricing Relationships at Expiration 2. C. you entered into a futures contract to buy €62.500 at $1. Suppose the futures price closes today at $1. A CME contract on €125. D.000. Yesterday. $1. At what settle price will you get a demand for additional funds to be posted? A. a randomly selected long contract will not get paid.500 at $1.500 at $1.04 × €62. $1. Futures B.5160 per €.50/€.208 per €.1920 per €.Chapter 07 #10 Topic: Futures Contracts: Some Preliminaries 11.5280/€ C.500/€ D. B.Chapter 07 #9 Topic: Futures Contracts: Some Preliminaries 10. At what settle price (use 4 decimal places) do you get a margin call? A. $1.500 and your maintenance level is $500. B. you entered into a futures contract to buy €62.208 per €.Chapter 07 #7 Topic: Futures Contracts: Some Preliminaries 8. C if the default is on the short side. $1. C.500 and your maintenance level is $500. the clearing member stands in for the defaulting party. D. None of the above Eun .Chapter 07 #8 Topic: Futures Contracts: Some Preliminaries 9. In the event of a default on one side of a futures trade.7. Your maintenance margin is $2. you entered into a futures contract to sell €62. Yesterday. $1. C. Swaps D. $1.50 per €. you entered into a futures contract to buy €62. B. Yesterday. D.50/€ = 4 percent of the contract value in dollars). $1.50 per €.750 (= 0. $1. Your initial margin was $3. Your initial performance bond is $1. At what settle price will you get a demand for additional funds to be posted? A. None of the above Eun . D.000 (meaning that your broker leaves you alone until your account balance falls to $2.000). $1.1920 per €. the clearing member will seek restitution for the defaulting party.Chapter 07 #11 Topic: Futures Contracts: Some Preliminaries . both a and b Eun . Forwards C.500 × $1. Eun . $1.1840 per €. Your initial performance bond is $1. That party will . $1. Eun .4720/€ B.4840 per €. In which market does a clearinghouse serve as a third party to all transactions? A. then have standing to initiate a civil suit against the defaulting short.500 at $1.5160 per €. A. 000. 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. go long in the futures contract.000).04 per € or $2. Three days ago.000. Today's settlement price on a Chicago Mercantile Exchange (CME) Yen futures contract is $0. $1. Go long in the spot market.12. None of the above Eun . (The contractual size of one CME Yen contract is ¥12.000). Go long in the spot market. Eun .750 D. go short in the futures contract. go long in the futures contract. go short in the futures contract. IRP B. B. Go short in the spot market. The next three days' settlement prices are $0.Chapter 07 #14 Topic: Currency Futures Markets 15.500 at $1.500.675. the changes in the margin account from daily marking-to-market.Chapter 07 #12 Topic: Futures Contracts: Some Preliminaries 13. $2.500 B.425.7996/¥100. Over the past three days the contract has settled at $1.Chapter 07 #16 Topic: Currency Futures Markets . If you have a short position in one futures contract. Lost $0. Go short in the spot market. C. What paradigm is used to define the futures price? A. Black Scholes D. $1.8057/¥100.500.Chapter 07 #15 Topic: Currency Futures Markets 16. What steps would assure an arbitrage profit? A.325.8057/¥100. Made $0. C.000. and $1.50 per €. you entered into a futures contract to sell €62. Your margin account currently has a balance of $2. $2. and $0.Chapter 07 #13 Topic: Currency Futures Markets 14.8011/ ¥100.425.8011/ ¥100. Risk Neutral Valuation Eun . $0. C. D. $0.50. D. and $0. $1.52.425. The next three days' settlement prices are $0. If you have a long position in one futures contract. Today's settlement price on a Chicago Mercantile Exchange (CME) Yen futures contract is $0. Eun . Hedge Ratio C. (The contractual size of one CME Yen contract is ¥12.000. B. Eun .06 per € or $3. will result in the balance of the margin account after the third day to be A.425.54. Your margin account currently has a balance of $2. B.7985/¥100.04 per € or $2.7996/¥100. $1. $2. How much have you made or lost? A. $3.7985/¥100. $3.500 C. Lost $0. D. Suppose the futures price is below the price predicted by IRP.