QUESTION 1

A call option is in the money if the current market price is below the strike price.

		True
		False

6.67 points

QUESTION 2

A 3 month european call option on francs has a strike price of $.58 and a call premium of $.02. Each contract has 3 million francs attached. Calculate the profit/loss (in USD) for someone who sold ten of these call options if the spot rate at expiration is SFr 1.9/$.

		600,000
		-600,000
		1,011,000
		-1,011,000

6.67 points

QUESTION 3

Assume that you purchased a 9 month call option and a 9 month put option on euros. Both the call and the put has 80,000 euros attached. The strike price for the call and put options is $1.38 and $1.35, respectively. The call and put premium is $.04 and $.05, respectively.

Calculate the dollar return of your porfolio if the spot rate is .8 euros per dollar when the options expire.

		11,200
		7,200
		-800
		800

6.67 points

QUESTION 4

European options are always profitable since they can not be exercised until the maturity date.

True

False

6.67 points

QUESTION 5

The minimum intrinsic value of an option is zero.

True

False

6.67 points

QUESTION 6

ABC (British firm) must make a payment of C$900,000 to one of its Canadian customers in three months. ABC decides to use call options to fully hedge its Canadian dollar payment. Three month call options on 100,000 Canadian dollars have an exercise price of .95 pounds and a premium of .03 pounds. Find ABC's profit/loss (in terms of pounds) if the exchange rate is .995 pounds per Canadian dollar at expiration.

		-13,500
		-27,000
		27,000
		13,500

6.67 points

QUESTION 7

Use the following information to answer the next two questions.

You believe the US dollar will increase relative to the Australian dollar (A$) and decrease relative to the Hong Kong dollar (HK$) over the next 6 months. You decide to create a portfolio consisting of 10 six month Australian dollar call contracts and 10 six month Hong Kong dollar put contracts. The call contracts have 10,000 Australian dollars attached and have a strike price and premium of $1.05 and $.02, respectively. The put contracts have 50,000 Hong Kong dollars attached and have a strike price and premium of $.12 and $.01, respectively.

Find the value of your portfolio (in USD) if the spot rates at expiration are as follows: $1.08/A$, $.14/HK$

		-3000
		-4000
		4000
		3000

6.67 points

QUESTION 8

Find the value of your portfolio (in USD) if the spot rates at expiration are as follows: $1.03/A$, $.09/HK$

		-8000
		8000
		5000
		-5000

6.67 points

QUESTION 9

You believe that pesos will depreciate relative to the dollar in 6 months and decide to use 10 put options to trade based on your belief. Each put option has 10,000 pesos attached. At the time you opened your position, the peso-dollar exchange rate was $.11/peso, and six month put options on pesos had an exercise price of $.09 and a premium of $.015. What would be your profit/loss (in USD) if the exchange rate is $.08/peso at expiration?

		1500
		500
		-500
		-1500

6.67 points

QUESTION 10

Suppose that an investor believed that the pound will appeciate against the dollar. Which of the following options strategies could the investor employ to trade based on her belief?

		Selling calls and selling puts on pounds
		Buying calls and buying puts on pounds.
		Buying calls and selling puts on pounds
		none of the above

6.67 points

QUESTION 11

XYZ (American firm) expects to receive 500,000 euros in 6 months from its operations in Spain. Which of the following techniques could be used to hedge XYZ's exposure to currency risk?

		Buy a six month forward contract with 500,000 euros attached.
		Buy six month call options with 500,000 euros attached.
		Buy six month put options with 500,000 euros attached.
		Sell six month put options with 500,000 euros attached.

6.67 points

QUESTION 12

Use the following information to answer the next two questions.

An analyst at DEF hedge fund believes that the euro (which currently trades at $1.25) will appreciate relative to the dollar over the next 6 months. The analyst decides to use ten 6 month call options to speculate. Each contract has 50,000 euros attached. The call options have a strike price of $1.30 and a call premium of $.05.

Find the analyst's profit/loss (in USD) if the spot price is $1.27 at expiration.

		10,000
		25,000
		-25,000
		-10,000

6.67 points

QUESTION 13

Find the analyst's profit/loss if the spot rate is .5/$ at expiration

		-325,000
		325,000
		-25,000
		25,000

6.67 points

QUESTION 14

Investors would consider purchasing a european call option if the expect the value of the underlying currency will depreciate prior to the exercise date.

True

False

6.67 points

QUESTION 15

One advantage that options have over futures contracts is that options traders are not required to pay any money upfront to enter into their position.

True

False