intl finance chapter 7
Which of the following is correct? Multiple Choice American options can be exercised early. European options can be exercised early. Asian options can be exercised early. all of the options
american options can be exercised early
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? Multiple Choice $1.58 = €1.00 $1.62 = €1.00 $1.68 = €1.00 $1.50 = €1.00
$1.58 = €1.00
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 Multiple Choice negative profit, so exercise would not occur. $3,125. . $6,125/(1 + i$)3/12. $6,125.
$3,125 €62,500 ($1.55 - $1.50) = $3,125
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 Multiple Choice (i), (ii), and (iv) (i), (ii), and (iii) (i), (iv), and (v) (ii) and (iii)
(i), (iv), and (v)
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 Multiple Choice $1.55 = €1.00 $1.55 × (1 + i$)3/12 = €1.00 × (1 + i€)3/12 none of the options $1.60 = €1.00
1.55=1.00
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? Multiple Choice $1.58 = €1.00 $1.68 = €1.00 $1.62 = €1.00 $1.50 = €1.00
1.58=1.00 $1.55 × €62,500 = $96,875 and $1.50 × €62,500 = $93,750. To buy the call, you also must pay a $5,000 option premium, so if exercised, the total amount paid will be $93,750 + $5,000 = $98,750. Solve the following for X: ($96,875 / $1.55) = ($98,750 / X).
The current spot exchange rate is $1.55/€ and the three-month forward rate is $1.50/€. Based on your analysis of the exchange rate, you are confident that the spot exchange rate will be $1.62/€ in three months. Assume that you would like to buy or sell €1,000,000. What actions do you need to take to speculate in the forward market? What is the expected dollar profit from speculation? Multiple Choice Buy €1,000,000 forward for $1.50/€. Buy €1,000,000 today at $1.55/€; wait three months, if your forecast is correct sell €1,000,000 at $1.62/€. Sell €1,000,000 forward for $1.50/€. Wait three months, if your forecast is correct buy €1,000,000 at $1.52/€.
Buy €1,000,000 forward for $1.50/€.
The current spot exchange rate is $1.50/€ and the three-month forward rate is $1.55/€. Based on your analysis of the exchange rate, you are confident that the spot exchange rate will be $1.62/€ in three months. Assume that you would like to buy or sell €1,000,000. What actions do you need to take to speculate in the forward market? What is the expected dollar profit from speculation? Multiple Choice Buy €1,000,000 today at $1.50/€; wait three months, if your forecast is correct sell €1,000,000 at $1.62/€. Wait three months, if your forecast is correct buy €1,000,000 at $1.62/€. Sell €1,000,000 forward for $1.50/€. Buy €1,000,000 forward for $1.55/€.
Buy €1,000,000 forward for $1.55/€.
For European options, what is the effect of an increase in the strike price E? Multiple Choice Increase the value of calls and puts ceteris paribus Decrease the value of calls, increase the value of puts ceteris paribus Increase the value of calls, decrease the value of puts ceteris paribus Decrease the value of calls and puts ceteris paribus
Decrease the value of calls, increase the value of puts ceteris paribus
Return to question Item 26 Item 26 1 points A European option is different from an American option in that Multiple Choice one is traded in Europe and one in traded in the United States. European options tend to be worth more than American options, ceteris paribus. American options have a fixed exercise price; European options' exercise price is set at the average price of the underlying asset during the life of the option. European options can only be exercised at maturity; American options can be exercised prior to maturity.
European options can only be exercised at maturity; American options can be exercised prior to maturity.
For European currency options written on euro with a strike price in dollars, what is the effect of an increase in the exchange rate S($/€)? Multiple Choice Increases the value of calls, decreases the value of puts ceteris paribus Decreases the value of calls, increases the value of puts ceteris paribus Increases the value of calls and puts ceteris paribus Decreases the value of calls and puts ceteris paribus
Increases the value of calls, decreases the value of puts ceteris paribus
The current spot exchange rate is $1.55/€ and the three-month forward rate is $1.50/€. Based on your analysis of the exchange rate, you are confident that the spot exchange rate will be $1.52/€ in three months. Assume that you would like to buy or sell €1,000,000. What actions do you need to take to speculate in the forward market? Multiple Choice Buy euro today at the spot rate, sell them forward. Take a long position in a forward contract on €1,000,000 at $1.50/€. Take a short position in a forward contract on €1,000,000 at $1.50/€. Sell euro today at the spot rate, buy them forward.
Take a long position in a forward contract on €1,000,000 at $1.50/€.
The current spot exchange rate is $1.45/€ and the three-month forward rate is $1.55/€. Based upon your economic forecast, you are pretty confident that the spot exchange rate will be $1.50/€ in three months. Assume that you would like to buy or sell €100,000. What actions would you take to speculate in the forward market? How much will you make if your prediction is correct? Multiple Choice Take a long position in a forward contract on euro. If you're right you will make $5,000. Take a short position in a forward. If you're right you will make $15,000. Take a short position in a forward contract on euro. If you're right you will make $5,000. Take a long position in a forward contract on euro. If you're right you will make $15,000.
Take a short position in a forward contract on euro. If you're right you will make $5,000. 1.55 × 100,000) = €155,000 and (1.5 × 100,000) = €150,000. The profit is found by €155,000 - €150,000 = €5,000.
Consider a trader who takes a long position in a six-month forward contract on the euro. The forward rate is $1.75 = €1.00; the contract size is €62,500. At the maturity of the contract the spot exchange rate is $1.65 = €1.00. The trader has lost $625. The trader has lost $66,287.88. The trader has made $6,250. The trader has lost $6,250.
The trader has lost $6,250. 1.75 × 62,500) = $109,375 and (1.65 × 62,500) = $103.125. The loss is found by $103,125 - $109,375 = -$6,250.
An "option" is Multiple Choice 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. 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. 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. 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.
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.
With currency futures options the underlying asset is Multiple Choice foreign currency. none of the options a futures contract on the foreign currency. a call or put option written on foreign currency.
a futures contract on foreign currency
Exercise of a currency futures option results in Multiple Choice a short futures position for the call buyer or put buyer. a long futures position for the put buyer or call writer. a short futures position for the call buyer or put writer. a long futures position for the call buyer or put writer.
a long futures position for the call buyer or put writer.
Which of the follow options strategies are consistent in their belief about the future behavior of the underlying asset price? Multiple Choice Buying calls and selling puts none of the options Buying calls and buying puts Selling calls and selling puts
buying calls and selling puts
Which of the following is correct? Multiple Choice Intrinsic value = option premium + time value Option premium = intrinsic value + time value Time value = intrinsic value + option premium Option premium = intrinsic value - time value
intrinsic value+time value
The current spot exchange rate is $1.55/€ and the three-month forward rate is $1.50/€. You enter into a short position on €1,000. At maturity, the spot exchange rate is $1.60/€. How much have you made or lost? Multiple Choice Made €100 Lost $100 Made $150 Lost $50
lost 100 dollars (1.5 × 1,000) = $1,500 and (1.6 × 1,000) = $1,600. $1,600 - $1,500 = $100.
The volume of OTC currency options trading is Multiple Choice much smaller than that of organized-exchange currency option trading. much larger than that of organized-exchange currency option trading. larger, because the exchanges are only repackaging OTC options for their customers. none of the options
much larger than that of organized-exchange currency option trading.
American call and put premiums Multiple Choice should be no larger than their intrinsic value. should be at least as large as their intrinsic value. should be no larger than their speculative value. should be exactly equal to their time value.
should be at least as large as their intrinsic value
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
