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The higher the exchange rate volatility:


A) both the higher the value of a put and the lower the value of a call
B) the lower the value of a call
C) both the higher the value of a put and the higher the value of a call
D) none of the given answers

E) A) and B)
F) C) and D)

Correct Answer

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On the expiry date of a European call currency option, the writer:


A) must buy the specified amount of the underlying currency, if put
B) may or may not buy the specified amount of the underlying currency
C) must sell the specified amount of the underlying currency, if called
D) may or may not sell the specified amount of the underlying currency

E) All of the above
F) C) and D)

Correct Answer

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If the spot exchange rate is greater than the exercise exchange rate, then:


A) the holder of a call option will exercise
B) the holder of a call option will not exercise
C) the writer of the option will buy the currency
D) both the holder of a call option will exercise and the writer of the option will buy the currency

E) A) and B)
F) B) and C)

Correct Answer

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A trader buys a call option at a premium of USD0.01. The call option gives him the right to buy AUD1 million at an exercise exchange rate of 0.9000 (USD/AUD) . Calculate the trader's net profit on expiry, assuming the exchange rate is 0.9200 at expiry.


A) -AUD10,000
B) -USD10,000
C) +AUD10,000
D) +USD10,000

E) A) and B)
F) A) and C)

Correct Answer

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A trader replicates a long forward position using put and call options. The options' strike is 0.9000 (USD/AUD) and both their premiums are USD0.02. Calculate the net payoff of the position if the spot exchange rate at expiry is 0.9300.


A) USD0.06
B) USD0.04
C) USD0.03
D) USD0.02

E) B) and C)
F) A) and D)

Correct Answer

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A short straddle position can be constructed by combining:


A) a short call and a long put
B) a long call and a short put
C) a long call and a long put
D) a short call and a short put

E) None of the above
F) A) and B)

Correct Answer

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A 'knock-out' option is:


A) a 'down and out' option
B) a 'barrier' option
C) designed to offer downside protection but only limited upside range before crossing a previously . specified barrier at which it expires automatically
D) any of the given answers

E) A) and B)
F) A) and C)

Correct Answer

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The exercise exchange rate is the rate at which:


A) the holder of a call option sells the underlying currency
B) the writer of a call option buys the underlying currency
C) both the holder of a call option sells the underlying currency and the writer of a call option buys the underlying currency
D) none of the given answers

E) A) and B)
F) C) and D)

Correct Answer

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A short forward position can be constructed by combining:


A) a short call and a long put
B) a long call and a short put
C) a long call and a long put
D) a short call and a short put

E) All of the above
F) A) and C)

Correct Answer

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A trader sells a put option. The put option requires him to buy AUD1 million at an exercise exchange rate of 0.9000 (USD/AUD) . Calculate the trader's gross profit on expiry, assuming the exchange rate is 0.9300 at expiry.


A) zero
B) +USD30,000
C) +AUD30,000
D) -USD30,000

E) B) and D)
F) B) and C)

Correct Answer

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A trader buys a call and a put option. The call option gives him the right to buy AUD1 million at an exercise exchange rate of 0.9000 (USD/AUD) , whereas the put option gives him the right to sell AUD1 million at the same exercise exchange rate. Calculate the trader's gross profit on expiry, assuming the exchange rate is 0.9100 at expiry.


A) -USD10,000
B) -AUD10,000
C) +AUD10,000
D) +USD10,000

E) A) and B)
F) A) and C)

Correct Answer

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A trader buys a call at a premium of USD0.02 and a put option at a premium of USD0.01. The call option gives him the right to buy AUD1 million at an exercise exchange rate of 0.9000 (USD/AUD) , whereas the put option gives him the right to sell AUD1 million at the same exercise exchange rate. Calculate the trader's net profit on expiry, assuming the exchange rate is 0.9500 at expiry.


A) +USD30,000
B) +USD10,000
C) +USD20,000
D) +USD50,000

E) C) and D)
F) A) and D)

Correct Answer

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An option is in the money if it:


A) can be exercised at gross profit
B) can be exercised at net profit
C) has a zero intrinsic value
D) has a negative intrinsic value

E) C) and D)
F) B) and C)

Correct Answer

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A

An 'Asian' option is:


A) a 'path-dependent' option
B) is exercised at expiry if the average spot rate over the period is lower than the exercise exchange rate
C) an 'average strike' option
D) any of the given answers

E) A) and C)
F) A) and B)

Correct Answer

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D

A 'naked' call currency option implies that:


A) the writer has no spot position in the underlying currency
B) the writer has a spot position in the underlying currency
C) the option can be exercised before the expiry date
D) the option cannot be exercised before the expiry date

E) B) and C)
F) B) and D)

Correct Answer

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A delta of 0.95 implies that the option is:


A) out of the money
B) in the money
C) at the money
D) any of the given answers, depending on other factors

E) C) and D)
F) B) and C)

Correct Answer

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A short put position gives:


A) the right to sell a currency
B) a commitment to sell a currency
C) the right to buy a currency
D) a commitment to buy a currency

E) A) and B)
F) C) and D)

Correct Answer

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D

A trader buys a call option. The call option gives him the right to buy AUD1 million at an exercise exchange rate of 0.9000 (USD/AUD) . Calculate the trader's gross profit on expiry, assuming the exchange rate is 0.9200 at expiry.


A) -AUD20,000
B) +USD20,000
C) +AUD20,000
D) -USD20,000

E) C) and D)
F) B) and D)

Correct Answer

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A long strangle is similar to a long straddle except that:


A) a strangle is more risky
B) a strangle is more expensive
C) a strangle is cheaper
D) a straddle is more risky

E) A) and D)
F) C) and D)

Correct Answer

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An American option is an option that:


A) is traded in America only
B) can be exercised on or before the expiry date
C) is issued by American companies
D) is only traded on the Chicago Board of Trade

E) None of the above
F) All of the above

Correct Answer

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