ch7 Futures and options on Foreign exchange

derivative security

A security whose value is contingent upon the value of the underlying security. Examples are futures, forward, and options contracts.

Suppose an investor purchased a call option with exercise price E for premium C on an asset that ends up with a terminal value of ST. The investor will at least break even at expiration if ______. (Note: assume that the time value of money is zero.)

ST > E + C

Match the European pricing formula Ce = [FTN(d1) − EN(d2)] exp(−r$T) term with its description or formula.

T-> the time until expiration Ft-> the time T futures price N()-> the cumulative area under the standard normal density function from −∞ to the argument E-> the exercise price

Which are currency futures exchanges?

The CME Group NASDAQ OMX

The lower bound of the market value of a European foreign currency call option will increase, or at least not decrease, with increases in which of the following?

The U.S. interest rate r$ The price of the underlying asset St

The lower bound of the market value of a European foreign currency put option will increase, or at least not decrease, with increases in which of the following?

The exercise price E The foreign interest rate ri

Which are characteristics of forward contracts?

They are derivatives. Delivery of the asset is commonly made.

Which of the following is true of over-the-counter currency options?

They are typically European options. They are written for large amounts,

Which of the following are true of futures contracts?

They have standardized features. They are derivatives. They are exchange-traded.

futures

a standardized foreign exchange contract with a future delivery date that is traded on organized exchanges

forward contract

a vehicle for buying or selling a stated amount of foreign exchange at a stated price per unit at a specified time in the future.

American Option

can be exercised at any time during the option contract

European option

can be exercised only at the maturity date of the contract

both forward and futures contracts are classified as

derivative or contingent claim securities

What are the terms used for the price specified in an options contract at which the underlying asset can be bought or sold?

exercise price strike price

The size of the position in the underlying asset that offsets the risk of an option can be calculated using the ______ ratio

hedge

the binomial option pricing model

is used to calculate the exact prices of options when the underlying asset can take two values in the future

All else equal, an American option should have a higher value the ______ its term because the ______ would be higher.

longer; time value

futures contracts are marked-to- ______________ on a daily basis at the new settlement price

market

Suppose that there are a call option and a put option each with exercise price E. If ST>E at expiration, which will be exercised?

only the call

Suppose that there are a call option and a put option each with exercise price E. If ST<E at expiration, which will be exercised?

only the put is in the money

Options that are tailor-made according to the specifications of the buyer in terms of maturity length, exercise price, and the amount of the underlying currency are traded ______.

over-the-counter

The price paid for an option is referred to as its

premium

An option to sell an underlying asset is a(n)

put

An option provides the ______, but not the ______, to buy or sell an underlying asset for a stated price over a stated time period.

right; obligation

The potential loss for the buyer of a call option is ______, and the potential loss for the seller (or writer) of a call option is ______.

the call premium; unlimited

the difference between an option's premium and intrinsic value is the option's

time value

The potential gain for the buyer of a call option is ______, and the potential gain for the seller (or writer) of a call option is ______.

unlimited; the call premium