CFA Practice Question

CFA Practice Question

Suppose on March 31, 20X0, on the Chicago Mercantile Exchange we have a currency option gives the owner the right to purchase Euros for dollars on September 31, 20XO. (The expiration months for currency options are usually March, June, September and December.) This currency option is EUR156, that is the option to buy Euro 1 for $1.56. (Note: Except for the Japanese Yen, currency option exercise prices are state in dollars. Japanese Yen options are stated in hundredths of cents). Suppose a trader purchases 10 contracts. The contract size on Chicago Mercantile Exchange is EUR 125,000 (which is double the size of Philadelphia currency option contracts).

The option premium is quoted as 0.40. What is the dollar premium that the trader pays?
A. $500,000
B. $5,000
C. $5,195,000
Explanation: Option premium is quoted in U.S. cents per unit of underlying currency with the exception of the Japanese yen.

User Contributed Comments 6

User Comment
moneyguy calculation, Analyst Notes? lazy, lazy, lazy......
shawnpope since the option premium is in cents you have to divide it by 100

Num Contracts * Contract Size * Option Premium/100
10*125,000*.40/100 =
sshetty2 contract size is stated in EUR, why wouldn't we have to convert back to USD?
deleeuw A little frustrating that AN has put absolutely zero effort into explaining the answers in the later practice tests
farhan92 to be fair the answer is kinda obvious here..the other answers aren't logical enough to be selected.
rojaslav In the middle of the real exam under so much stress logic can be quite subjective for all of us, so a brief calculation like shawnpope's would've been nice. That's what we paid for.
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