ch06_2 - 6-1Butler / Multinational FinanceChapter 6...

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Unformatted text preview: 6-1Butler / Multinational FinanceChapter 6 Currency Options and Options MarketsChapter 6Chapter 6Currency Options and Options MarketsCurrency Options and Options MarketsLearning objectivesOption payoffsPayoff profiles and profit/loss diagramsOption value determinantsHedging with optionsCombinations of options & with underlying positionsExchange rate volatilityImplied volatility6-2Butler / Multinational FinanceChapter 6 Currency Options and Options MarketsA forward obligationA 1 million obligation due in four monthsUnderlying transactionCurrency exposure-1,000,000v$/s$/Option payoffsOption value determinantsCombinations of optionsAdvanced: Currency option valuationForward versus option payoffs Currency option contractsOption payoff profilesPut-call parity at expiration6-3Butler / Multinational FinanceChapter 6 Currency Options and Options MarketsA forward hedgeBuy 1 million in the forward market at the forward price F1$/= $1.60/Long pound forwardExposure of forward contract+1,000,000v$/s$/-$1,600,000Option payoffsOption value determinantsCombinations of optionsAdvanced: Currency option valuationForward versus option payoffs Currency option contractsOption payoff profilesPut-call parity at expiration6-4Butler / Multinational FinanceChapter 6 Currency Options and Options MarketsAn option hedgeA currency option is like one-half of a forward contract-the option holder gains if pound sterling rises-the option holder does not lose if pound sterling fallsLong pound call(option to buypound sterling)s$/v$/Option payoffsOption value determinantsCombinations of optionsAdvanced: Currency option valuationForward versus option payoffs Currency option contractsOption payoff profilesPut-call parity at expiration6-5Butler / Multinational FinanceChapter 6 Currency Options and Options MarketsCME pound Dec 1600 call (American)Type of option: a call optionto buy pounds Underlying asset: CME December pound sterling futures contractContract size: 62,500Expiration date: 3rd week of DecemberExercise price: $1.60/Rule for exercise: an Americanoption exercisable anytime until expirationOption payoffsOption value determinantsCombinations of optionsAdvanced: Currency option valuationForward versus option payoffsCurrency option contracts Option payoff profilesPut-call parity at expiration6-6Butler / Multinational FinanceChapter 6 Currency Options and Options MarketsCurrency option quotationsBritish pound (CME)62,500 pounds; cents per poundStrikeCalls-SettlePuts-SettlePriceOctNovDecOctNovDec1580 8.99 . . . . 10.45 7.00 7.77 8.48 15908.49 9.26 9.97 7.49 8.27 8.98 1600 8.00 8.78 9.49 8.00 8.78 9.49 1610 7.54 8.32 9.04 8.54 9.31 10.02 1620 7.10 7.88 8.60 9.09 . . . . 10.57 Note: S$/= Ft$/= $1.60/ (for i$= i) Option payoffsOption value determinantsCombinations of optionsAdvanced: Currency option valuationForward versus option payoffsCurrency option contracts Option payoff profilesPut-call parity at expiration6-7...
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This note was uploaded on 07/07/2011 for the course FINS 5516 taught by Professor Dl during the Three '11 term at South Australia.

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ch06_2 - 6-1Butler / Multinational FinanceChapter 6...

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