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Eun & Resnick 4e
CHAPTER 7 Futures and Options on
Foreign Exchange
Futures
Contracts: Some Preliminaries
Currency
Futures Markets
International Finance
in Practice:
CME Ramping Up FOREX
Support, Targets OTC Business
Basic
Currency Futures Relationships
Eurodollar Interest Rate Futures
Contracts
Options Contracts: Some
Preliminaries
Currency Options Markets
Currency Futures Options
Basic Option-Pricing Relationships at
Expiration
American Option-Pricing
Relationships
European Option-Pricing
Relationships
Binomial Option-Pricing
Model
European Option-Pricing Formula
Empirical Tests of Currency Options
Summary
MINI CASE:
The Options Speculator
Futures Contracts: Some Preliminaries
1
A CME contract
on ?125,000 with September delive
ry
a)
Is an example
of a forward contract
b)
Is an example of a futures contract
c)
Is an example
of a put option
d)
Is an example of a call option
Answer: b)
Rationale:
options trade on the CBOE
2
Yesterday, you
entered into a futures contract to buy ?62,500 at
$$1.20 per ?. Suppose
that the futures
price closes today at $$1.16. How much have you
made/lost?
a)
Depends on your margin balance
b)
You have made
$$2,500.00
c)
You
have lost $$2,500.00
d)
You have neither made nor lost money,
yet.
Answer: c)
Rationale:
You have lost $$0.04, 6
2,500 times for a
total loss of $$2,500 = $$0.04/? ×
?62,500
3
In reference to
the futures market, a “speculator”
a)
attempts to
profit from a change in the futures price
b)
wants
to
avoid
price
variation
by
locking
in
a
purchase
price
of
the
underlying
asset
through
a
long
position
in
the
futures
contract
or
a
sales
price
through
a
short
position in the futures contract
c)
stands ready
to buy or sell contracts in unlimited quantity
d)
b) and c)
Answer: a)
4
Comparing “forward” and “futures”
exchange contracts, we can sa
y that:
a)
They are both
“marked
-to-
market”
daily.
b)
Their
major
difference
is
in
the
way
the
underlying
asset
is
priced
for
future
purchase or sale:
futures settle daily and forwards settle at
maturity.
c)
A
futures contract is negotiated by open outcry
between floor brokers or traders
and is
traded on organized exchanges, while forward
contract is tailor-made by an
international bank for its clients and
is traded OTC.
d)
b) and c)
Answer: d)
5
Comparing “forward” and “futures”
exchange contracts, we can say that
a)
Delivery of
the underlying asset is seldom made in futures
contracts
b)
Delivery of the underlying asset is
usually made in forward contracts
c)
Delivery
of
the
underlying
asset
is
seldom
made
in
either
contract
—
they
are
typically cash settled
at maturity.
d)
a) and b)
e)
a) and c).
Answer:
d)
6
In which market does a clearinghouse
serve as a third party to all transactions?
a)
Futures
b)
Forwards
c)
Swaps
d)
None of the
above
Answer: a)
7
In the event of
a default on one side of a futures trade,
a)
The clearing
member stands in for the defaulting party
b)
The clearing
member will seek restitution for the defaulting
party
c)
If the
default is on the short side, a randomly selected
long contract will not get
paid. That
party will then have standing to initiate a civil
suit against the
defaulting short.
d)
a) and b)
Answer: d)
8
Yesterday, you
entered into a futures contract to buy ?62,500 at
$$1.20 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)
$$1.2160 per
?.
b)
$$1.208 per ?.
c)
$$1.1920 per
?.
d)
$$1.1840 per ?.
Answer: d)
Rationale: To get
a margin call, you have to lose $$1,000. That will
happen when the price
FALLS (since
you’re buying euro) to $$1.1840 per ?:
[
$$1.20/ ? –
$$1.1840 per ?] × ?62,500 =
$$1,000.
9
Yesterday, you entered into a futures
contract to sell ?62,500 at $$1.20 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)
$$1.2160 per
?.
b)
$$1.208 per ?.
c)
$$1.1920 per
?.
d)
$$1.1840 per ?.
Answer: a)
Rationale: To get
a margin call, you have to lose $$1,000. That will
happen when the price
RISES (since
you’re selling euro at $$1.20 per ?.
) to
$$1.2160 per ?:
[
$$1.2160/ ? –
$$1.20 per ?] × ?62,500 =
$$1,
000.
10
Three days
ago, you entered into a futures contract to sell
?62,500 at $$1.20 per ?.
Over the past
three days the contract has settled at $$1.20,
$$1.22, and $$1.24. How
much have you
made or lost?
a)
Lost $$0.04 per ? or $$2,500
b)
Made $$0.04 per
? or $$2,500
c)
Lo
st $$0.06 per ? or
$$3,750
d)
None of the above
Answer: a)
Rationale: Losses will happen when the
price RISES (since you’re selling euro at
$$1.20
per ?.
)
Total loss
[
$$1.20/ ?
–
$$1.24 per ?] × ?62,500 =
–
$$2,500
Currency Futures Markets
11
Today’s
settlement
pric
e
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
$$0.7985/?
100.
(The
contractual
size
of
one
CME
Yen
contract
is
?
12,500,000).
If
you have a short position
in one futures contract, the changes in the margin
account
from daily marking-to-market
will result in the balance of the margin account
after
the third day to be
a)
$$1,425
b)
$$2,000
c)
$$2,325
d)
$$3,425
Answer: c) not unlike Problem 1 at the
end-of-chapter exercises
Rationale:
$$2,325 = $$2,000 +
?
12,500,0
00×
[(0.008011
–
0.008057) + (0.008057
–
0.007996) + (0.007996
–
0.007985)]
Please note
that $$0.8011/?
100 =
$$0.008011/?
and $$0.8057/?
100
= $$0.008057/?
, etc.
12
Today’s
settlement
price
on
a
Chicago
Mercantile
Exchange
(CME)
Yen
futures
contract
is
$$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)
$$1,425
b)
$$1,675
c)
$$2,000
d)
$$3,425
Answer: b) not unlike
Problem 1 at the end-of-chapter exercises
Rationale: $$1,675 = $$2,000 +
?
12,500,000×
[(0.008057 -
0.008011) + (0.007996
–
0.008057) + (0.007985
–
0.007996)]
Please note that
$$0.8011/?
100 = $$0.008011/?
and $$0.8057/?
100 =
$$0.008057/?
, etc.
Basic Currency Futures Relationships
13
Open interest in currency futures
contracts
a)
Tends to be greatest for the near-term
contracts
b)
Tends to be greatest for the longer-
term contracts
c)
Typically decreases with the term to
maturity of most futures contracts
d)
a) and c)
Answer: a)
14
The “open
interest” shown in currency futures quotations
is:
a)
the total number of people indicating
interest in buying the contracts in the near
future
b)
the total number of people indicating
interest in selling the contracts in the near
future
c)
the total number of people indicating
interest in buying or selling the contracts in
the near future
d)
the total
number of long or short contracts outstanding for
the particular delivery
month
Answer: d)
Eurodollar Interest Rate Futures
Contracts
15
The most widely used futures contract
for hedging short-term U.S. dollar interest rate
risk is:
a)
The Eurodollar contract
b)
The Euroyen
contract
c)
The
EURIBOR contract
d)
None of the above
Answer: a)
16
Consider the
position of a treasurer of a MNC, who has
$$20,000,000 that his firm will
not need
for the next 90 days:
a)
He could borrow the $$20,000,000 in the
money market
b)
He could take a long position in the
Eurodollar futures contract.
c)
He could take
a short position in the Eurodollar futures
contract
d)
None
of the above
Answer: b)
17
A
DECREASE
in
the
implied
three-month
LIBOR
yield
causes
Eurodollar
futures
price
a)
To increase
b)
To decrease
c)
There is no
direct or indirect relationship
d)
None of the
above
Answer: a)
Options Contracts: Some Preliminaries
18
If
you think that the dollar is going to appreciate
against the euro
a)
You should buy put options on the euro
b)
You should
sell call options on the euro
c)
You should buy
call options on the euro
d)
None of the above
Answer: c)
19
From the perspective of the
write
r of a put
option
written on ?62,500.
If the strike
price is
$$1.25/?,
and the option premium
is
$$1,875, at
what
exchange
rate do
you
start to lose money?
a)
$$1.22/?
b)
$$1.25/?
c)
$$1.28/?
d)
None of the
above
Answer: a)
$$1,875
?
$$0.03/
?
.
Since it’s a put option,
Rationale: Per
euro, the option premium is
?62,500
the
writer
loses
money
when
the
price
goes
down,
thus
he
breaks
even
at
$$1.25/?
–
$$0.03/? = $$1.22/?
20
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.
c)
European
options tend to be worth more than American
options,
ceteris paribus.
d)
American
options have a fixed exercise price;
Europea
n options’ exercise price is
set at the average price of the
underlying asset during the life of the option.
Answer: b)
21
An “option”
is
(
名词解释
)
a)
a contract
giving the seller (writer) the right, but not the
obligation, to buy or sell
a given
quantity of an asset at a specified price at some
time in the future
b)
a contract giving the owner (buyer) the
right, but not the obligation, to buy or sell
a given quantity of an asset at a
specified price at some time in the future
c)
not a
derivative, nor a contingent claim, security
d)
unlike a
futures or forward contract
Answer:
b)
22
An investor believes that the price of
a stock, say IBM’s shares, will increase in the
next
60
days.
If
the
investor
is
correct,
which
combination
of
the
following
investment strategies will show a
profit in all the choices?
(i) - buy the stock and hold it for
60 days
(ii) - buy a put
option
(iii) - sell
(write) a call option
(iv) - buy a call option
(v) - sell (write) a put option
a)
(i), (ii), and
(iii)
b)
(i),
(ii), and (iv)
c)
(i), (iv), and (v)
d)
(ii) and (iii)
Answer: c)
Currency Options Markets
23
Most exchange
traded currency options
a)
Mature every month, with daily
resettlement.
b)
Have original maturities of 1, 2, and 3
years.
c)
Have
original maturities of 3, 6, 9, and 12 months.
d)
Mature every
month, withOUT daily resettlement
Answer: c)
24
The volume of
OTC currency options trading is
a)
Much smaller
than that of organized-exchange currency option
trading.
b)
Much
larger than that of organized-exchange currency
option trading.
c)
Larger,
because
the
exchanges
are
only
repackaging
OTC
options
for
their
customers
d)
None of the
above
Answer: b)