Chap07 Part II Options

Chap07 Part II Options - onForeignExchange 1...

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01/18/10 Chapter 7 Part II -- Options 1 Chapter 7 Part II – Options  on Foreign Exchange
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01/18/10 Chapter 7 Part II -- Options 2 Currency Options Definition An option is a contract that provides the right, but not the obligation, to buy or sell an asset at a specified price within a specified period of time. A standard amount of an available currency at a fixed exchange rate for a fixed time period Note : when applying to currencies it is important to state which currency is the "asset". We will refer to the foreign (non-US) currency as the asset, and state prices in dollars. Call Options Put Options
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Calls vs. Puts Calls vs. Puts Call options gives the holder the right, but not the obligation, to buy a given quantity of some asset at some time in the future, at prices agreed upon today. Put options gives the holder the right, but not the obligation, to sell a given quantity of some asset at some time in the future, at prices agreed upon today. 01/18/10 Chapter 7 Part II -- Options 3
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01/18/10 Chapter 7 Part II -- Options 4 Currency Options Terminology The Option Premium is the amount paid for the option. Option contracts are for a fixed number of units of the underlying currency; e.g., £12,500. American options can be exercised at any time up to the expiration date. European options can only be exercised at the expiration date. Since this option to exercise early generally has value, American options are usually worth more than European options, other things equal.
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01/18/10 Chapter 7 Part II -- Options 5 Currency Options Terminology Options can be purchased or sold (written). The owner decides whether or not to exercise. The writer is obligated to take the other side of the transaction. Exercise price / Strike price The exchange rate at which the option holder can buy or sell the contracted currency
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Intrinsic vs. Speculative Value Intrinsic Value The difference between the exercise price of the option and the spot price of the underlying asset. Speculative Value The difference between the option premium and the intrinsic value of the option. OPTION PREMIUM = INTRINSIC VALUE + SPECULATIVE VALUE 01/18/10 Chapter 7 Part II -- Options 6
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Chapter 7 Part II -- Options 7 Currency Options Markets Currency options were 9% of daily global forex market in 2004. PHLX (Philadelphia Stock Exchange) Started trading in 1983 Part of Nasdaq now HKFE (Hong Kong Futures Exchange), European Options Exchange (Amsterdam), Chicago Mercantile Exchange, and Montreal Stock Exchange OTC volume is much bigger than exchange volume. Trading is in six major currencies against the U.S. dollar on
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This note was uploaded on 01/17/2010 for the course FINA 4810 taught by Professor Hamilton during the Spring '08 term at UGA.

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Chap07 Part II Options - onForeignExchange 1...

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