Exam 5: Currency Derivatives

The highest amount a buyer of a call or a put option can lose is the exercise price.

A put option premium has a lower bound that is equal to the greater of zero and the difference between the underlying ____ prices. The upper bound of a call option premium is the ____ price.

Both call and put option premiums are affected by the level of the existing spot price relative to the strike price; for example, a high spot price relative to the strike price will result in a relatively high premium for a call option but a relatively low premium for a put option.

A European option can be exercised at any time prior to maturity, while an American option can only be exercised at maturity.

The premium on a pound put option is $.03 per unit. The exercise price is $1.60. The break-even point is ____ for the buyer of the put, and ____ for the seller of the put. (Assume zero transactions costs and that the buyer and seller of the put option are speculators.)

A straddle is a speculative strategy that represents the purchase of both a call and a put.

The shorter the time to the expiration date for a currency, the ____ will be the premium of a call option, and the ____ will be the premium of a put option, other things equal.

If a currency call option is in the money, then the present exchange rate exceeds the strike price.

Forward contracts are usually liquidated by actual delivery of the currency, while futures contracts are usually liquidated by offsetting transactions.

Frank is an option speculator. He anticipates the Danish kroner to appreciate from its current level of $.19 to $.21. Currently, kroner call options are available with an exercise price of $.18 and a premium of $.02. Should Frank attempt to buy this option? If the future spot rate of the Danish kroner is indeed $.21, what is his profit or loss per unit?

You purchase a call option on pounds for a premium of $.03 per unit, with an exercise price of $1.64; the option will not be exercised until the expiration date, if at all. If the spot rate on the expiration date is $1.65, your net profit per unit is:

Which of the following is true for futures, but not for forwards?

If a currency's forward rate exhibits a premium, that currency is forced to depreciate.

Which of the following is not true regarding futures contracts?

Non-deliverable forward contracts (NDFs) are frequently used for currencies in emerging markets.

When the current exchange rate is less than the strike price, a call option with that strike price will be in the money and a put option with that strike price will be out of the money.

Carl is an option writer. In anticipation of a depreciation of the British pound from its current level of $1.50 to $1.45, he has written a call option with an exercise price of $1.51 and a premium of $.02. If the spot rate at the option's maturity turns out to be $1.54, what is Carl's profit or loss per unit (assuming the buyer of the option acts rationally)?

Non-deliverable forward contracts (NDFs) are frequently used for currencies in emerging markets.

Currency options are only traded on exchanges. That is, there is no over-the-counter market for options.

If you expect the euro to depreciate, it would be appropriate to ____ for speculative purposes.