Kirt C. Butler, Solutions for Multinational Finance, 4th edition

Chapter 6 Currency Options and Options Markets
Answers to Conceptual Questions
6.1

What is the difference between a call option and a put option?
A call option is an option to buy the underlying asset at a predetermined exercise price. A put option is an option to sell the underlying asset at the exercise price.

6.2

What are the differences between exchange-traded and over-the-counter currency options?
Exchange-traded currency options are standardized as to currencies, maturity, exercise prices, and settlement procedures. Over-the-counter options traded by commercial and investment banks can be tailored to fit the needs of the client.

6.3

In what sense is a currency call option also a currency put option?
Because an option to buy one currency is simultaneously an option to sell another currency, currency options are both a call (on one currency) and a put (on the other currency).

6.4

In what sense is a currency forward contract a combination of a put and a call?
A currency forward contract to buy currency f at a forward price of FTd/f at time T can be replicated by purchasing a European call option on currency f with the same expiration date and an exercise price Kd/f = FTd/f and simultaneously selling a put option at the same exercise price and maturity date. Conversely, a short forward contract on currency f is a combination of a written call on f and a purchased put on f with the same expiration date and exercise price.

6.5

What are the six determinants of a currency option value?
The determinants of currency option values are riskless domestic and foreign interest rates, the exercise price, the underlying spot (or futures) price, the expiration date, and the volatility of the underlying exchange rate.

6.6

What determines the intrinsic value of an