Finance

CH6

* Foreign currency option -> a contract giving to option purchaser the right but not the obligation to buy or sell a fixed amount of foreign currency at a set price on or before a set date.

* Call option: - option to buy.

* Put option: - option to sell.

I. An option, which can only be exercised at the maturity date, is an European option.

II. An option, which can be exercised at any time between when it’s written and the maturity date, is an American option.

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* Markets:-

1. Organized exchange: - standardized in terms of amount of currency and maturity.

2. Over the counter (OTC).

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# Pricing Element:

1. The exercise or strike price, the exchange rate at the foreign currency can put or call.

2. The premium, cost, price. Or value of the option.

3. The underlying or actual spot exchange rate in the market.

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* Value terms: -

1. At The Money: an option in which the strike price equals to underlying spot price. X=S

2. In The Money: an option that would be profitable if exercise immediately (ignoring the premium).

* Call S>X

* Put S<X

3. Out OF The Money: an option that would not be profitable if exercise.

* Call S<X

* Put S>X

* Determination of option value: how does an increase in the determination affect premium holding all else contract?

Elements | Calls | Puts |

1- Underlying spot prices | in | de |

2- Strike price. | de | in |

3- Time to maturity. | in | in |

4-Volatilty of the currency underlying. | in | in |

5- Riskless rate of interest domestic. | in | de |

6- Riskless rate of interest foreign. | de | in |

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* Currency future contracts: an exchange traded contract...