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Currency Options. Currency Options. Meaning of a Currency Option Types of Options Classification of Options Hedging and Speculation Using Currency Options Determining profit/loss on an option. Currency Options. A contract between two parties —a buyer and a seller/writer—

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Presentation Transcript
currency options2
Currency Options
  • Meaning of a Currency Option
  • Types of Options
  • Classification of Options
  • Hedging and Speculation Using Currency Options
  • Determining profit/loss on an option
currency options3
Currency Options
  • A contract between two parties
  • —a buyer and a seller/writer—
  • in which the buyer purchases from the seller/writer the right to buy or sell a currency at a predetermined exchange rate.
  • The buyer pays the seller a fee called the premium, which is the option’s price.
    • An option to buy an asset at a predetermined price (also known as exercise price) is known as the call option
    • An option to sell as asset at a predetermined price (also known as exercise price) is known as put option
types of options
Types of Options
  • European Style
    • It can be exercised at the discretion of the option buyer/option holder only at the maturity of the option
  • American Style
    • It can be exercised at the discretion of the option buyer/option holder at any time before maturity or at maturity of the option
classification of options
Classification of Options
  • In-the-Money Option
    • One that would lead to positive cash flows to the holder if it were exercised immediately
  • At-the-Money Option
    • One that would lead to zero cash flows to the holder if it were exercised immediately
  • Out-of-Money Option
    • One that would lead to negative cash flows to the holder if it were exercised immediately
slide6
In-Money Calls and Puts
    • Call is in the money if ST > E
    • Put is in the money if E > ST
  • Out of Money Calls and Puts
    • Call is out of money if ST < E
    • Put is out of money if E < ST
strategies using currency options
Strategies Using Currency Options
  • Long a Call Option/Buy a Call Option
    • Buy a right to purchase a foreign currency at a predetermined exchange rate
  • Long a Put Option
    • Buy a right to sell a foreign currency at a predetermined exchange rate
hedging and speculation
Hedging and Speculation
  • Foreign Currency Cash Outflows
  • Risk: Foreign currency may increase in value against domestic currency
  • Strategy: Buy a call option on the foreign currency
  • Foreign Currency Cash Inflows
  • Risk: Foreign currency may decrease in value against domestic currency
  • Strategy: Buy a put option on the foreign currency
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