54)
For European currency options written on euro with a
strike price in dollars, what is the effect of an increase in the
exchange rate S($/€)?
A)
Decreases the value of calls and puts
ceteris
paribus
B)
Increases the value of calls and puts
ceteris
paribus
C)
Decreases the value of calls, increases the value
of puts
ceteris paribus
D)
Increases the
value of calls, decreases
the value of puts
ceteris
paribus

55)
For European currency options written on euro with a
strike price in dollars, what is the effect of an
increase
in the
exchange rate S(€/$)?

56)
The equation for a European Call Option is a function
of which variables?
A
B

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C)
Both A and B
D)
Neither A or B
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57)
The hedge ratio

58)
Find the value of a call option written on €100 with a
strike price of $1.00 = €1.00. In one period, there are two
possibilities: the exchange rate will move up by 15 percent or
down by 15 percent (i.e. $1.15 = €1.00 or $0.85 = €1.00). The
U.S. risk-free rate is 5 percent over the period. The risk-
neutral probability of dollar depreciation is
2
/
3
and the risk-
neutral probability of the dollar strengthening is
1
/
3
{MISSING IMAGE}
.
A)
$9.5238
B)
$0.0952
C)
$0
D)
$3.1746

59)
Use the binomial option pricing model to find the
value of a call option on £10,000 with a strike price of
€12,500. The current exchange rate is €1.50/£1.00 and in the
next period the exchange rate can increase to €2.40/£ or
decrease to €0.9375/€1.00 (i.e.
u
= 1.6 and
d
= 1/
u
= 0.625).
The current interest rates
are
i
€
= 3% and are
i
£
4%.
Choose the answer
closest to yours
.
=

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C)
€3,373
D)
€3,243
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60)
Find the hedge ratio for a call option on £10,000 with
a strike price of €12,500. The current exchange rate is
€1.50/£1.00 and in the next period the exchange rate can
increase to €2.40/£ or decrease to €0.9375/€1.00 (i.e.
u
= 1.6
and
d
= 1/
u
= 0.625).The current interest rates are
i
€
= 3% and
are
i
£
= 4%.
Choose the
answer closest to yours
.