Download Hull_OFOD9e_MultipleChoice_Questions_and_Answers_Ch17.doc PDF

TitleHull_OFOD9e_MultipleChoice_Questions_and_Answers_Ch17.doc
TagsOption (Finance) Put Option Hedge (Finance) Exchange Rate Beta (Finance)
File Size108.8 KB
Total Pages7
Document Text Contents
Page 6

Tdd
T

TrrKS
d

dNKedNeSc

f

rTTrf







 

12

2
0

1

210

)2/()/ln(

)()(

In this case 9825.02.1 405.00 
 eeS

Trf and 1077.12.1 402.0   eKe rT

7.05.0
41.0

4)2/1.005.002.0()1ln(
12

2

1 


 Tddd

The correct answer is therefore C.

16.A European at-the-money put option on a currency has four years until
maturity. The exchange rate volatility is 10%, the domestic risk-free rate is 2%
and the foreign risk-free rate is 5%. The current exchange rate is 1.2000.
What is the value of the option?

A. 1.11N(0.7)-0.98N(0.5)
B. 1.11N(-0.7)-0.98N(-0.5)
C. 1.11N(0.7)-0.98N(0.4)
D. 1.11N(-0.06)-0.98N(-0.10)

Answer: A

The formula is

Tdd
T

TrrKS
d

dNeSdNKep

f

TrrT f







 

12

2
0

1

102

)2/()/ln(

)()(

In this case 9825.02.1 405.00 
 eeS

Trf and 1077.12.1 402.0   eKe rT

7.05.0
41.0

4)2/1.005.002.0()1ln(
12

2

1 


 Tddd

The correct answer is therefore A.

17.Which of the following is true when a European currency option is valued
using forward exchange rates?

A. It is not necessary to know the domestic interest rate or the spot
exchange rate

B. It is not necessary to know either the foreign or domestic interest rate
C. It is necessary to know the difference between the foreign and

domestic interest rates but not the rates themselves
D. It is not necessary to know the foreign interest rate or the spot

exchange rate

Answer: D

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