IBF301 | Que Anh Nguyen
Chapter 7_Tutorial Questions
A. Eun Chap 6
1. What is the major difference in the obligation of one with a long position in a futures (or
forward) contract in comparison to an options contract?
2. List the arguments (variables) of which an FX call or put option model price is a function. How
does the call and put premium change with respect to a change in the arguments?
3. Assume today’s settlement price on a CME EUR futures contract is $1.3140/EUR. You have a
short position in one contract. Your performance bond account currently has a balance of
$1,700. The next three days’ settlement prices are $1.3126, $1.3133, and $1.3049. Calculate
the changes in the performance bond account from daily marking-to-market and the balance of
the performance bond account after the third day.
4. Do problem 3 again assuming you have a long position in the futures contract.
5. Using the quotations in Exhibit 7.3, calculate the face value of the open interest in the
September 2019 Swiss franc futures contract.
6. Using the quotations in Exhibit 7.3, note that the June 2019 Mexican peso futures contract has
a price of $0.05143 per MXN. You believe the spot price in June will be $0.05795 per MXN.
What speculative position would you enter into to attempt to profit from your beliefs? Calculate
your anticipated profits, assuming you take a position in three contracts. What is the size of
your profit (loss) if the futures price is indeed an unbiased predictor of the future spot price and
this price materializes?
7. Do problem 4 again assuming you believe the June 2019 spot price will be $0.04491 per MXN.
8. Assume that the Japanese yen is trading at a spot price of 92.04 cents per 100 yen. Further
assume that the premium of an American call (put) option with a striking price of 93 is 2.10
(2.20) cents. Calculate the intrinsic value and the time value of the call and put options.
9. Assume spot Swiss franc is $0.7000 and the six-month forward rate is $0.6950. What is the
minimum price that a six-month American call option with a striking price of $0.6800 should sell
for in a rational market? Assume the annualized six-month Eurodollar rate is 3 ½ percent.
10. Do problem 9 again assuming an American put option instead of a call option.
B. Additional MCQs
1. Comparing "forward" and "futures" exchange contracts, we can say that
A) a futures contract is negotiated by open outcry between floor brokers or traders and is traded on
organized exchanges, while forward contract is tailor-made by an international bank for its clients
and is traded OTC.
B) their major difference is in the way the underlying asset is priced for future purchase or sale:
futures settle daily and forwards settle at maturity.
C) they are both "marked-to-market" daily.
D) their major difference is in the way the underlying asset is priced for future purchase or sale:
futures settle daily and forwards settle at maturity, and a futures contract is negotiated by open
outcry between floor brokers or traders and is traded on organized exchanges, while a forward
contract is tailor-made by an international bank for its clients and is traded OTC.
IBF301 | Que Anh Nguyen
2. Yesterday, you entered into a futures contract to sell €75,000 at $1.79 per €. Your initial
performance bond is $1,500 and your maintenance level is $500. At what settle price will you get a
demand for additional funds to be posted?
A) $1.7767 per €. B) $1.6676 per €. C) 1.1840 per €. D) 1.2084 per €.
3. Today's settlement price on a Chicago Mercantile Exchange (CME) yen futures contract is
$0.8011/¥100. Your margin account currently has a balance of $2,000. The next three days'
settlement prices are $0.8057/¥100, $0.7996/¥100, and $0.7985/¥100. (The contractual size of
one CME yen contract is ¥12,500,000). If you have a long position in one futures contract, the
changes in the margin account from daily marking-to-market, will result in the balance of the
margin account after the third day to be
A) $1,425. B) $2,000. C) $3,425 D) $1,675.
4. Suppose you observe the following one-year interest rates, spot exchange rates and futures
prices. Futures contracts are available on €10,000. How much risk-free arbitrage profit could you
make on one contract at maturity from this mispricing?
A) $159.22 B) $439.42 C) $153.10 D) none of the options
5. Which equation is used to define the futures price?
6. Open interest in currency futures contracts
A) tends to be greatest for the longer-term contracts.
B) typically decreases with the term to maturity of most futures contracts.
C) ends to be greatest for the near-term contracts.
D) tends to be greatest for the near-term contracts, and typically decreases with the term to
maturity of most futures contracts
7. A European option is different from an American option in that
A) one is traded in Europe and one in traded in the United States.
B) European options can only be exercised at maturity; American options can be exercised prior to
maturity.
IBF301 | Que Anh Nguyen
C) 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.
D) European options tend to be worth more than American options, ceteris paribus.
8. Exercise of a currency futures option results in
A) a long futures position for the put buyer or call writer.
B) short futures position for the call buyer or put writer.
C) long futures position for the call buyer or put writer.
D) short futures position for the call buyer or put buyer.
9. 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
A) $1.55 = €1.00.
B) 60 = €1.00.
C) $1.55 × (1 + i$)^3/12 = €1.00 × (1 + i€)^3/12.
D) none of the options
10. 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?
A) $1.58 = €1.00 B) $1.68 = €1.00 C) $1.62 = €1.00 D) $1.50 = €1.00
11. American call and put premiums
A) should be no larger than their speculative value.
B) should be exactly equal to their time value.
C) should be at least as large as their intrinsic value.
D) should be no larger than their intrinsic value.
12. Assume that the dollar–euro spot rate is $1.28 and the six-month forward rate is FT = Ste
(r$ - r€)T = $1.28e.01 × .5 = $1.2864. The six-month U.S. dollar rate is 5 percent and the
Eurodollar rate is 4 percent. The minimum price that a six-month American call option with a
striking price of $1.25 should sell for in a rational market is
A) 3 cents. B) 3.47 cents. C) 0 cents. D) 3.55 cents.
13. For European options, what is the effect of an increase in the strike price E?
A) Increase the value of calls, decrease the value of puts ceteris paribus
B) Decrease the value of calls, increase the value of puts ceteris paribus
C) Decrease the value of calls and puts ceteris paribus
IBF301 | Que Anh Nguyen
D) Increase the value of calls and puts ceteris paribus
14. For European currency options written on euro with a strike price in dollars, what is the effect of
an increase in the exchange rate S(€/$)?
A) Increases the value of calls, decreases the value of puts ceteris paribus
B) Increases the value of calls and puts ceteris paribus
C) Decreases the value of calls, increases the value of puts ceteris paribus
D) Decreases the value of calls and puts ceteris paribus
15. With regard to expiration date,
A) futures contracts have tailor-made delivery dates that meet the needs of the investor.
B) futures contracts have standardized delivery dates.
C) futures contracts do not have delivery dates.
D) forward contracts have standardized delivery dates.
