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  • Currency Options V

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    DERIVATIVES are financial contracts which derive their values from the underlying assets or securities like stock or a currency. They are of four types:Forwards Futures Options Swaps currency options are a contract for future delivery of a specific currency in exchange for another. The holder of the option has the right to buy (or sell) the currency at an agreed price.

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    DERIVATIVES are financial contracts which derive their values from the underlying assets or securities like stock or a currency. They are of four types:Forwards Futures Options Swaps currency options are a contract for future delivery of a specific currency in exchange for another. The holder of the option has the right to buy (or sell) the currency at an agreed price.

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    10 просмотров14 страниц

    Currency Options V

    Загружено:

    9986212378
    DERIVATIVES are financial contracts which derive their values from the underlying assets or securities like stock or a currency. They are of four types:Forwards Futures Options Swaps currency options are a contract for future delivery of a specific currency in exchange for another. The holder of the option has the right to buy (or sell) the currency at an agreed price.

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    Attribution Non-Commercial (BY-NC)
    Скачайте в формате PPT, PDF, TXT или читайте онлайн в Scribd
    Отметить как неприемлемый контент
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    DERIVATIVES

    Derivatives are financial contracts which derive their values from the underlying assets or securities like stock or a currency. They are important tools used by business for speculation and hedging. They are of four types:Forwards Futures Options Swaps

    Currency options

    Definition
    A foreign exchange option is a contract for future delivery of a specific currency in exchange for another, in which the holder of the option has the right to buy (or sell) the currency at an agreed price. A contract (agreement) Giving a right to buy/ sell A specific asset At a specific price Within a specific time period

    Types of options
    Call option Put option
    Right to buy a currency Useful in an appreciating market Right to sell a currency Useful in a depreciating market

    Call and put option may be of two types

    European option: can be exercised only on expiry date American option: can be exercised any time upto expiry date

    Options terminology

    EXERCISE/STRIKE PRICE: The price at which options are exercised.


    PREMIUM: The value or price of the option. IN-THE-MONEY: Strike price is less than spot price.

    AT-THE-MONEY: Strike price is equal to spot price.


    OUT-OF-THE-MONEY: Strike price is greater than spot price.

    Parties to option contracts


    Purchaser/Holder ( trader)
    Has right to exercise (may exercise or may not exercise)

    Writer/ seller ( dealer or speculator)


    Has obligation to perform (when purchaser exercises the right)

    Options market
    Listed currency options market (organised exchange)
    Philadelphia stock exchange (1982) Standardised contracts Clearing house acts as counter party Maturity is fixed Friday preceding third Wednesday of March, June, Sept., Dec.

    Over the counter options market

    Inter bank/ bank to customer dealings Customised contracts

    Profit or loss on options trading: Call option buyer


    Firm buys 100,000 call options (Euro) Strike price Rs.60.50: premium Re.0.05 On maturity: if spot rate = Rs.60.65, option will be exercised Buyers gain= (S-X-C)*100,000 If spot rate on maturity is below Rs.60.50, option will expire unexercised; loss is the premium paid (Rs.5000)

    Profit or loss on options trading: put option buyer


    Firm buy 20,000 put options (USD) Strike price = Rs.45.40; premium Re.0.03 On maturity: If spot price is Rs.45, option will be exercised. Buyers gain= (X-S-C)*20,000 If spot price exceeds Rs.45.43, option will expire; loss is limited to premium of Re.0.03 per option

    WHO NEEDS OPTIONS?


    Useful for anyone who requires a gain if the exchange rate goes one way, but wants protection against loss if the rate goes the other way. For hedgers For speculators

    Implications for managers


    Changing currency values may:create opportunities for firms, or expose firms to risks. Affect value of individual purchases and sales Affect value of assets in different countries Affect value of liabilities denominated in different currencies. These changing values affect the profitability and values of firms.

    It is important that managers understand the potential to manage those challenges and opportunities with appropriate financial market transactions. Managers must adjust their exposures to currency fluctuations without having to disrupt their normal business operations.

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