Question 1

The holder of a call currency option has:
A) the right to buy a currency
B) the right to sell a currency
C) the obligation to buy a currency
D) the obligation to sell a currency

Accepted Answer

The holder of a call currency option has the right to buy a currency, not an obligation. This allows the holder to purchase the currency at a specified price within a certain time frame.

Question 2

The writer of a put currency option has:
A) the right to buy a currency
B) the right to sell a currency
C) the obligation to buy a currency
D) the obligation to sell a currency

Accepted Answer

The writer of a put currency option has the obligation to buy the currency if the option is exercised by the holder.

Question 3

The holder of a put currency option has:
A) the right to buy a currency
B) the right to sell a currency
C) the obligation to buy a currency
D) the obligation to sell a currency

Accepted Answer

The holder of a put currency option has the right to sell a currency, not the obligation. This allows the holder to sell the currency at the strike price before the option expires if it is beneficial for them.

Question 4

The writer of a call currency option has:
A) the right to buy a currency
B) the right to sell a currency
C) the obligation to buy a currency
D) the obligation to sell a currency

Accepted Answer

The writer (seller) of a call currency option has the obligation to sell the currency if the buyer decides to exercise the option.

Question 5

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

Accepted Answer

A 'naked' call currency option means the writer (seller) of the call option does not hold an underlying position in the currency itself, exposing them to potentially unlimited losses if the currency value rises.

Question 6

The exercise exchange rate is the rate at which:
A) the holder of a call option sells the underlying currency
B) the holder of a call option buys the underlying currency
C) the holder of a put option buys the underlying currency
D) none of the given answers

Accepted Answer

The exercise exchange rate for a call option is the rate at which the holder can buy the underlying currency. This is a fundamental aspect of how call options work in the context of currency or forex trading.

Question 7

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

Accepted Answer

The exercise exchange rate is the rate at which the holder of an option can buy (call option) or sell (put option) the underlying currency, not specifically related to the actions described in options A, B, or C.

Question 8

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

Accepted Answer

The holder of a call option will exercise the option when the spot exchange rate is greater than the exercise exchange rate, as it allows them to buy the currency at a lower price than the current market rate.

Question 9

The difference between gross profit and net profit in option transactions is:
A) brokerage fees
B) the option premium
C) taxes
D) fixed costs

Accepted Answer

The answer of The difference between gross profit and net...

Question 10

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. If the exchange rate at expiry is 0.8500 will the trader exercise the options?
A) He will exercise both options
B) He will exercise the put but not the call option
C) He will exercise the call but not the put option
D) He will exercise neither option

Accepted Answer

The trader will exercise the put option to sell AUD at the higher exercise rate of 0.9000, but will not exercise the call option because the market rate of 0.8500 is more favorable for buying AUD.

Question 11

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

Accepted Answer

The trader can buy AUD1 million at 0.9000 USD/AUD when the market rate is 0.9200 USD/AUD, making a profit of 0.0200 USD/AUD. Multiplying the profit per AUD by 1 million gives a gross profit of USD20,000.

Question 12

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

Accepted Answer

Since the exchange rate at expiry (0.9300 USD/AUD) is higher than the exercise exchange rate (0.9000 USD/AUD), the put option will not be exercised by the holder, resulting in no transaction and thus no profit or loss for the trader.

Question 13

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

Accepted Answer

The trader's net profit is calculated by first determining the intrinsic value of the option at expiry, which is the difference between the market exchange rate at expiry (0.9200 USD/AUD) and the exercise exchange rate (0.9000 USD/AUD), multiplied by the amount of AUD1 million. This gives a profit of (0.9200 - 0.9000) * 1,000,000 = USD20,000. After subtracting the premium paid for the call option (USD0.01 * 1,000,000 = USD10,000), the net profit is USD10,000.

Question 14

A trader sells a put option at a premium of USD0.02. The put option requires him 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 0.9300 at expiry.
A) zero
B) +USD20,000
C) +AUD20,000
D) -USD20,000

Accepted Answer

The trader receives a premium of USD0.02 per AUD1, so for AUD1 million, the premium received is USD0.02 x 1,000,000 = USD20,000. Since the exchange rate at expiry is higher than the exercise exchange rate, the put option will not be exercised, and the trader will keep the premium received. Therefore, the trader's net profit on expiry is USD20,000.

Question 15

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

Accepted Answer

The trader will exercise the call option to buy AUD1 million at 0.9000 USD/AUD, as the market rate is 0.9100 USD/AUD. This results in a gross profit of (0.9100 - 0.9000) * 1,000,000 = USD10,000. The put option will not be exercised because the market rate is more favorable than the exercise rate for selling AUD.

Question 16

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

Accepted Answer

The answer of A trader buys a call at a...

Question 17

On the expiry date of a European call currency option, the holder:
A) must buy the specified amount of the underlying currency
B) may or may not buy the specified amount of the underlying currency
C) must sell the specified amount of the underlying currency
D) may or may not sell the specified amount of the underlying currency

Accepted Answer

The holder of a European call currency option has the right, but not the obligation, to buy the specified amount of the underlying currency at the strike price on the expiry date.

Question 18

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

Accepted Answer

On the expiry date of a European call currency option, if the option is exercised (called), the writer (seller) of the option is obligated to sell the specified amount of the underlying currency at the strike price. European options can only be exercised at expiration, and the term "called" refers to the exercise of a call option.

Question 19

A long call 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

Accepted Answer

A long call position provides the holder with the right, but not the obligation, to buy a currency at a specified price within a certain period of time.

Question 20

A long 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

Accepted Answer

A long put position grants the holder the right, but not the obligation, to sell a currency at a specified price within a certain period.

Quiz 10: Currency Options

The holder of a call currency option has:

The writer of a put currency option has:

The holder of a put currency option has:

The writer of a call currency option has:

A 'naked' call currency option implies that:

The exercise exchange rate is the rate at which:

The exercise exchange rate is the rate at which:

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

The difference between gross profit and net profit in option transactions is:

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 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 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 trader sells a put option at a premium of USD0.02. The put option requires him 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 0.9300 at expiry.

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

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

A long call position gives:

A long put position gives: