Multiple Choice Questions chap 8 – Options Futures

  1. Yesterday, you entered into a futures contract to buy €62,500 at $1.50 per €. Suppose the futures price
closes today at $1.46. 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.
 
2. 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. both b) and c)
 
3. Comparing "forward" and "futures" exchange contracts, we can say 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. both b) and c)
 
4. 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. both a) and b)
E. both a) and c)

 5. 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
 
6. 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. both a) and b)
 
7. Yesterday, you entered into a futures contract to buy €62,500 at $1.50 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. $1.5160 per €.
B. $1.208 per €.
C. $1.1920 per €.
D. $1.4840 per €.
 
8. Yesterday, you entered into a futures contract to sell €62,500 at $1.50 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. $1.5160 per €.
B. $1.208 per €.
C. $1.1920 per €.
D. $1.1840 per €.

9. Three days ago, you entered into a futures contract to sell €62,500 at $1.50 per €. Over the past three days the
contract has settled at $1.50, $1.52, and $1.54. How much have you made or lost? 
A. Lost $0.04 per € or $2,500
B. Made $0.04 per € or $2,500
C. Lost $0.06 per € or $3,750
D. None of the above

10. 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 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.

11. 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.
 
12. Suppose the futures price is below the price predicted by IRP. What steps would assure an arbitrage profit? 
A. Go short in the spot market, go long in the futures contract.
B. Go long in the spot market, go short in the futures contract.
C. Go short in the spot market, go short in the futures contract.
D. Go long in the spot market, go long in the futures contract.
 
13. What paradigm is used to define the futures price? 
A. IRP
B. Hedge Ratio
C. Black Scholes
D. Risk Neutral Valuation
14. Suppose you observe the following 1-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 1 contract at
maturity from this mispricing?

    
A. $159.22
B. $153.10
C. $439.42
D. None of the above
 

 15. Which equation is used to define the futures price? 

A. 

B. 

C. 

D. 

 16. If a currency futures contract (direct quote) is priced below the price implied by Interest Rate Parity (IRP),
arbitrageurs could take advantage of the mispricing by simultaneously 
A. going short in the futures contract, borrowing in the domestic currency, and going long in the foreign
currency in the spot market.
B. going short in the futures contract, lending in the domestic currency, and going long in the foreign currency
in the spot market.
C. going long in the futures contract, borrowing in the domestic currency, and going short in the foreign
currency in the spot market.
D. going long in the futures contract, borrowing in the foreign currency, and going long in the domestic
currency, investing the proceeds at the local rate of interest.
 
17. 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. both a) and c)
 
18. 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.
 
19. If you think that the dollar is going to appreciate against the euro, you should 
A. buy put options on the euro.
B. sell call options on the euro.
C. buy call options on the euro.
D. none of the above

 20. From the perspective of the writer of a put option written on €62,500. If the strike price is $1.55/€, and the
option premium is $1,875, at what exchange rate do you start to lose money? 
A. $1.52/€
B. $1.55/€
C. $1.58/€
D. None of the above
 
21. 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; European options' exercise price is set at the average price of
the underlying asset during the life of the option.
 
22. An "option" is 
A. a contract giving the seller (writer) of the option the right, but not the obligation, to buy (call) or sell (put) a
given quantity of an asset at a specified price at some time in the future.
B. a contract giving the owner (buyer) of the option the right, but not the obligation, to buy (call) or sell (put) a
given quantity of an asset at a specified price at some time in the future.
C. a contract giving the owner (buyer) of the option the right, but not the obligation, to buy (put) or sell (call) a
given quantity of an asset at a specified price at some time in the future.
D. a contract giving the owner (buyer) of the option the right, but not the obligation, to buy (put) or sell (sell) a
given quantity of an asset at a specified price at some time in the future.
  
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.
 
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
 25. In the CURRENCY TRADING section of The Wall Street Journal, the following appeared under the
heading OPTIONS:

   

Which combination of the following statements are true?

(i)- The time values of the 68 May and 69 May put options are respectively .30 cents and .50 cents.
(ii)- The 68 May put option has a lower time value (price) than the 69 May put option.
(iii)- If everything else is kept constant, the spot price and the put premium are inversely related.
(iv)- The time values of the 68 May and 69 May put options are, respectively, 1.63 cents and 0.83 cents.
(v)- If everything else is kept constant, the strike price and the put premium are inversely related. 
A. (i), (ii), and (iii)
B. (ii), (iii), and (iv)
C. (iii) and (iv)
D. ( iv) and (v)
 
26. Consider the graph of a call option shown at right. The option is a three-month American call option on
€62,500 with a strike price of $1.50 = €1.00 and an option premium of $3,125. What are the values of A, B, and
C, respectively?

    
A. A = -$3,125 (or -$.05 depending on your scale); B = $1.50; C = $1.55
B. A = -€3,750 (or -€.06 depending on your scale); B = $1.50; C = $1.55
C. A = -$.05; B = $1.55; C = $1.60
D. none of the above
 27. The current spot exchange rate is $1.55 = €1.00; the three-month U.S. dollar interest rate is 2%. Consider a
three-month American call option on €62,500 with a strike price of $1.50 = €1.00. What is the least that this
option should sell for? 
A. $0.0562,500 = $3,125
B. $3,125/1.02 = $3,063.73
C. $0.00
D. none of the above
 
28. Which of the follow options strategies are consistent in their belief about the future behavior of the
underlying asset price? 
A. Selling calls and selling puts
B. Buying calls and buying puts
C. Buying calls and selling puts
D. None of the above
 
29. American call and put premiums 
A. should be at least as large as their intrinsic value.
B. should be at no larger than their moneyness.
C. should be exactly equal to their time value.
D. should be no larger than their speculative value.

30. Which of the following is correct? 

A. Time value = intrinsic value + option premium
B. Intrinsic value = option premium + time value
C. Option premium = intrinsic value - time value
D. Option premium = intrinsic value + time value
 
31. Which of the following is correct? 
A. European options can be exercised early.
B. American options can be exercised early.
C. Asian options can be exercised early.
D. All of the above
 
32. For an American call option, A and B in the graph are

    
A. time value and intrinsic value.
B. intrinsic value and time value.
C. in-the-money and out-of-the money.
D. none of the above