Homework 9 190

he spot exchange rate for AUD is $.6776. What is the minimum price that a three-month American call option with a strike price of $.6500 should sell for in a rational market? Assume the annualized Australian interest rate is 1% and the annualized US interest rate is 2%. $.0293 $.0291 $.0276 $0

$.0291

The current spot exchange rate is $1.55 = €1.00; the three-month forward exchange rate is $1.57 = €1.00; the three-month U.S. dollar interest rate is 2 percent per year. 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? $3,125/1.02 = $3,063.73 $0.07 × 62,500 = $4,375 $0.00 $0.05 × 62,500 = $3,125

$0.07 × 62,500 = $4,375

In the CURRENCY TRADING section of The Wall Street Journal, the following appeared under the heading OPTIONS: Philadelphia Exchange Puts Swiss Francs 69.33 62,500 Swiss Francs-cents per unit Vol. Last 68 May 12 0.30 69 May 50 0.50 (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. Which combination of the following statements are true?

(i), (ii), and (iii)

Which of the following is correct? Intrinsic value = option premium + time value Option premium = intrinsic value - time value Option premium = intrinsic value + time value Time value = intrinsic value + option premium

Option premium = intrinsic value + time value

A 1-year call option on the British pound has a strike price of $1.25/£. The spot interest rate today is $1.30/£ and the interest rates in the US and the UK are 1% and 2%, respectively. If the pound can only appreciate to $1.40/£ or depreciate to $1.20/£ in a year, which of the following statements is correct? The hedge ratio of the call option is 25%. The risk-neutral probability of the pound appreciates is 45%. The call option value should be $0.20/£ in a year if the pound appreciates. The call option should be valued at $0.0648/£ today.

The call option should be valued at $0.0648/£ today.

A 1-year call option on the British pound has a strike price of $1.30/£. The spot interest rate today is $1.25/£ and the interest rates in the US and the UK are 1% and 2%, respectively. If the pound can only appreciate to $1.50/£ or depreciate to $1.10/£ in a year, which of the following statements is correct? The call option should be valued at $0.0682/£ today. The call option will be worth $0.30 if the pound appreciates. The call option has no value today. The hedge ration of the call option is 25%.

The call option should be valued at $0.0682/£ today.

exercise premium

The option premium is the total amount that investors pay for an option

If the spot price for MXN increases, which of the following statements is correct? The value of a put option on pesos should increase. The values of both call and put options on pesos should decrease. The value of a call option on pesos should increase. The values of both call and put options on pesos should increase.

The value of a call option on pesos should increase.

Are the following two options equivalent? A call option on €1 with an exercise price of $1.60.- A put option on $1.60 with an exercise price of €1.

Yes

What is an option?

a contract which conveys to its owner, the holder, the right, but not the obligation, to buy or sell a specific quantity of an underlying asset or instrument at a specified strike price on or before a specified date

For an American call option, A and B in the graph are, respectively time value and intrinsic value. None of the options. intrinsic value and time value. in-the-money and out-of-the money.

intrinsic value and time value.

What's a call option?

is a contract that provides the buyer the right to purchase a security.

What's a put option?

is a contract that provides the buyer the right to sell a security.

American call and put premiums should be no larger than their intrinsic value. should be at least as large as their intrinsic value. should be exactly equal to their time value. should be no larger than their speculative value.

should be at least as large as their intrinsic value.

Two options have identical terms except that one is American-style and the other is European-style. It can be inferred that __________. the American-style option should sell at least as much as the European-style option None of the options. the European-style option should sell at least as much as the American-style option the options should sell at the same price

the American-style option should sell at least as much as the European-style option

exercise price (strike price)

the purchase or sale price specified on an option contract