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International Finance - FINAL > FINAL > Flashcards

FINAL Flashcards

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1
Q

As a Call Option Buyer, when do I exercise for call?

A

When (S*>X)

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2
Q

What do I have to pay to buy a Call Option?

A

A Call Premium

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3
Q

For speculation purposes, what should I do with Option when I think stock price will increase?

A

Buy Call Option
Sell Put Option

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4
Q

For speculation purposes, what should I do with Option when I think stock price will decrease?

A

Sell Call Option
Buy Put Option

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5
Q

When I import goods in a foreign country, what should I do with Option to hedge the risk?

A

Buy Call Option
Sell Put Option
=> Decrease the spread, hence the risk

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6
Q

What are the five determinants of an Option Price/Premium?

A

(i) Price of underlying asset
(ii) Exercise price (X)
(iii) Time to maturity
(iv) Variability of underlying asset price
(v) Rf interest rate

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7
Q

What is the relation between Option Price and Price of underlying asset?

A

Call option => Positive relationship
Put option => Negative relationship

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8
Q

What is the relation between Option Price and Exercise price?

A

Call option => Negative relationship
Put option => Positive relationship

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9
Q

What is the relation between Option Price and Time to maturity?

A

Positive relationship for both

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10
Q

What is the relation between Option Price and Variability of underlying asset price?

A

Positive relationship for both

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11
Q

What is the relation between Option Price and Rf interest rate?

A

Call option => Positive relationship
Put option => Negative relationship

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12
Q

What is the formula for the Call option price?

A

Call option price = current asset price - current value of exercise price
S*-X

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13
Q

What is the formula for the Put option price?

A

Put option price = current value of exercise price - current asset price
X-S*

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14
Q

Why are Options used?

A

Hedging and Speculation

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15
Q

Why are Forward used?

A

Only for hedging

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16
Q

What is the difference between Options and Forwards?

A

Forwards have an obligation to exercise at maturity

17
Q

What is the price of a Forward?

A

Free

18
Q

How is the Forward price determined?

A

It reflects investors’ expectation on future spot price

19
Q

Why are Future used?

A

For hedging and Speculation

20
Q

What is the mechanism of Futures contract?

A

When futures prices increase, the differences between yesterday and today price is paid from the seller to the buyer
=> Daily cash flow, marking-to-market transaction

21
Q

What is the main difference between Forwards and Futures?

A

Forward: contract between buyer and commercial bank => tailored
Future: standardized, not customizable

International Finance - FINAL (1 decks)

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