CHAPTER 7 FUTURES AND OPTIONS ON FOREIGN EXCHANGE
QUESTIONS
1. Explain Explain the basic differenc differences es between between the operatio operation n of a currency currency forward forward maret maret and a futures maret.
!. In order for a deri"ati"es maret to function most efficiently efficiently## two types of economic a$ents are needed% hed$ers and speculators. Explain.
&. 'hy are most futures futures positions positions closed closed out throu$h throu$h a re"ersin$ re"ersin$ trade trade rather rather than than held to deli"ery(
). *ow can the +, futures maret be used for price disco"ery(
-. 'hat 'hat is the maor maor differe difference nce in the obli$ation obli$ation of one with a lon$ position position in a futures futures /or forward0 contract in comparison to an options contract(
. 'hat is meant by the terminolo$y that an option is in2# at2# or out2of2the2money out2of2the2money( (
PROBLEMS - SEE END END OF LECTURE SLIDES FOR PROBLEMS
1.
Yester esterda dayy, you entere entered d into into a futu futures res contr contract act to to buy €62,50 €62,500 0 at $1.5 $1.50 0 per €. Your Your ini inial al performance bond is $1,500 and your maintenance level is $500. Belo !at se"le price ill be t!e #rst me you et a demand for addional funds to be posted%
&. $1.5160 per €. B. $1.20' per €. (. $1.1)20 per €. *. $1.+'+0 per €. 2.
Yester esterda dayy, you enter entered ed into into a futur futures es contr contract act to to buy €62,50 €62,500 0 at $1.50 $1.50€. €. Your Your ini inial al marin marin as as $-,50 / 0.0+ €62,500 $1.50€ + percent of t!e contract value in dollars. Your Your maintenance marin is $2,000 /meanin t!at your bro3er leaves you alone unl your account balance falls to belo $2,000. Belo !at se"le price /use + decimal places ill be t!e #rst me you et a marin call%
&. $1.+20€ B. $1.52'0€ (. $1.500€ *. 4one of t!e above -.
odays odays se"l se"leme ement nt pric price e on a (!ic (!icao ao 7erc 7ercan anle le 89c 89c!an !ane e /(78 /(78 Yen futur futures es cont contra ract ct is $0.'011:100. Your Your marin account currently !as a balance of $2,000. !e ne9t t!ree days se"lement prices are $0.'05:100, $0.))6:100, and $0.)'5:100. /!e contractual si;e of one (78 Yen contract contract is :12,500,000. :12,50 0,000. er t!e t!ird day to be
&. $1,+25. B. $2,000. (. $2,-25. *. $-,+25.
+.?uppose you observe t!e folloin 1=year interest rates, spot e9c!ane rates and futures prices. @utures contracts are available available on €10,000. Ao muc! ris3=free arbitrae pro#t could you ma3e on 1 contract at maturity from t!is mispricin%
&. $15).22 B. $15-.10 (. $+-).+2 *. 4one of t!e above
5. !e current spot e9c!ane rate is $1.55 €1.00 and t!e t!ree=mont! forard forard rate is $1.60 €1.00. (onsider a t!ree=mont! &merican call opon on €62,500 it! a stri3e price of $1.50 €1.00.
&. $6,125. B. $6,125/1 i $-12. (. neave pro#t, so e9ercise ould not occur. *. $-,125.
Soluton:
<ernave *.
!e value value of t!e opon opon C you you can buy for $1.50 $1.50 9 €62,500 €62,500 $)-,50. $)-,50. !e value value of t!e €62,500 €62,500 $)6,'5. Dro#t $-,125.
6.
!e !e curre current nt spot spot e9c!a e9c!ane ne rate rate iiss $1.55 $1.55 €1.00 €1.00 and t!e t!ree= t!ree=mon mont! t! for forard ard rate rate iiss $1.60 $1.60 €1.00. (onsider a t!ree=mont! &merican call opon on €62,500. @or t!is opon to be considered at=t!e=money, t!e stri3e price must be
&. $1.60 €1.00 B.
$1.55 €1.00
(. $1.55 /1 i $-12 €1.00 /1 i €-12 *. none of t!e above above
