Ch007-Futures-and-Options

Eun/Resnick4e76Eun&Resnick4eCHAPTER7FuturesandOptionsonForeignExchangeFuturesContracts:SomePreliminariesCurrencyFuturesMarketsInternationalFinanceinPractice:CMERampingUpFOREXSupport,TargetsOTCBusinessBasicCurrencyFuturesRelationshipsEurodollarInterestRateFuturesContractsOptionsContracts:SomePreliminariesCurrencyOptionsMarketsCurrencyFuturesOptionsBasicOption-PricingRelationshipsatExpirationAmericanOption-PricingRelationshipsEuropeanOption-PricingRelationshipsBinomialOption-PricingModelEuropeanOption-PricingFormulaEmpiricalTestsofCurrencyOptionsSummaryMINICASE:TheOptionsSpeculatorFuturesContracts:SomePreliminaries1ACMEcontracton€125,000withSeptemberdeliverya)Isanexampleofaforwardcontractb)Isanexampleofafuturescontractc)Isanexampleofaputoptiond)IsanexampleofacalloptionAnswer:b)Rationale:optionstradeontheCBOE2Yesterday,youenteredintoafuturescontracttobuy€62,500at$1.20per€.Supposethatthefuturespriceclosestodayat$1.16.Howmuchhaveyoumade/lost?a)Dependsonyourmarginbalanceb)Youhavemade$2,500.00c)Youhavelost$2,500.00d)Youhaveneithermadenorlostmoney,yet.Answer:c)Rationale:Youhavelost$0.04,62,500timesforatotallossof$2,500=$0.04/€×€62,5003Inreferencetothefuturesmarket,a“speculator”a)attemptstoprofitfromachangeinthefuturespriceb)wantstoavoidpricevariationbylockinginapurchasepriceoftheunderlyingassetthroughalongpositioninthefuturescontractorasalespricethroughashortpositioninthefuturescontractc)standsreadytobuyorsellcontractsinunlimitedquantityd)b)andc)Answer:a)Eun/Resnick4e774Comparing“forward”and“futures”exchangecontracts,wecansaythat:a)Theyareboth“marked-to-market”daily.b)Theirmajordifferenceisinthewaytheunderlyingassetispricedforfuturepurchaseorsale:futuressettledailyandforwardssettleatmaturity.c)Afuturescontractisnegotiatedbyopenoutcrybetweenfloorbrokersortradersandistradedonorganizedexchanges,whileforwardcontractistailor-madebyaninternationalbankforitsclientsandistradedOTC.d)b)andc)Answer:d)5Comparing“forward”and“futures”exchangecontracts,wecansaythata)Deliveryoftheunderlyingassetisseldommadeinfuturescontractsb)Deliveryoftheunderlyingassetisusuallymadeinforwardcontractsc)Deliveryoftheunderlyingassetisseldommadeineithercontract—theyaretypicallycashsettledatmaturity.d)a)andb)e)a)andc).Answer:d)6Inwhichmarketdoesaclearinghouseserveasathirdpartytoalltransactions?a)Futuresb)Forwardsc)Swapsd)NoneoftheaboveAnswer:a)7Intheeventofadefaultononesideofafuturestrade,a)Theclearingmemberstandsinforthedefaultingpartyb)Theclearingmemberwillseekrestitutionforthedefaultingpartyc)Ifthedefaultisontheshortside,arandomlyselectedlongcontractwillnotgetpaid.Thatpartywillthenhavestandingtoinitiateacivilsuitagainstthedefaultingshort.d)a)andb)Answer:d)8Yesterday,youenteredintoafuturescontracttobuy€62,500at$1.20per€.Yourinitialperformancebondis$1,500andyourmaintenancelevelis$500.Atwhatsettlepricewillyougetademandforadditionalfundstobeposted?a)$1.2160per€.b)$1.208per€.c)$1.1920per€.d)$1.1840per€.Answer:d)Rationale:Togetamargincall,youhavetolose$1,000.ThatwillhappenwhenthepriceFALLS(sinceyou’rebuyingeuro)to$1.1840per€:[$1.20/€–$1.1840per€]×€62,500=$1,000.Eun/Resnick4e789Yesterday,youenteredintoafuturescontracttosell€62,500at$1.20per€.Yourinitialperformancebondis$1,500andyourmaintenancelevelis$500.Atwhatsettlepricewillyougetademandforadditionalfundstobeposted?a)$1.2160per€.b)$1.208per€.c)$1.1920per€.d)$1.1840per€.Answer:a)Rationale:Togetamargincall,youhavetolose$1,000.ThatwillhappenwhenthepriceRISES(sinceyou’resellingeuroat$1.20per€.)to$1.2160per€:[$1.2160/€–$1.20per€]×€62,500=$1,000.10Threedaysago,youenteredintoafuturescontracttosell€62,500at$1.20per€.Overthepastthreedaysthecontracthassettledat$1.20,$1.22,and$1.24.Howmuchhaveyoumadeorlost?a)Lost$0.04per€or$2,500b)Made$0.04per€or$2,500c)Lost$0.06per€or$3,750d)NoneoftheaboveAnswer:a)Rationale:LosseswillhappenwhenthepriceRISES(sinceyou’resellingeuroat$1.20per€.)Totalloss[$1.20/€–$1.24per€]×€62,500=–$2,500CurrencyFuturesMarkets11Today’ssettlementpriceonaChicagoMercantileExchange(CME)Yenfuturescontractis$0.8011/¥100.Yourmarginaccountcurrentlyhasabalanceof$2,000.Thenextthreedays’settlementpricesare$0.8057/¥100,$0.7996/¥100,and$0.7985/¥100.(ThecontractualsizeofoneCMEYencontractis¥12,500,000).Ifyouhaveashortpositioninonefuturescontract,thechangesinthemarginaccountfromdailymarking-to-marketwillresultinthebalanceofthemarginaccountafterthethirddaytobea)$1,425b)$2,000c)$2,325d)$3,425Answer:c)notunlikeProblem1attheend-of-chapterexercisesRationale:$2,325=$2,000+¥12,500,000×[(0.008011–0.008057)+(0.008057–0.007996)+(0.007996–0.007985)]Pleasenotethat$0.8011/¥100=$0.008011/¥and$0.8057/¥100=$0.008057/¥,etc.Eun/Resnick4e7912Today’ssettlementpriceonaChicagoMercantileExchange(CME)Yenfuturescontractis$0.8011/¥100.Yourmarginaccountcurrentlyhasabalanceof$2,000.Thenextthreedays’settlementpricesare$0.8057/¥100,$0.7996/¥100,and$0.7985/¥100.(ThecontractualsizeofoneCMEYencontractis¥12,500,000).Ifyouhavealongpositioninonefuturescontract,thechangesinthemarginaccountfromdailymarking-to-market,willresultinthebalanceofthemarginacco