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Lecture Multinational financial management: Chapter 7 - Ngo Thi Ngoc Huyen

Chapter 7 "Foreign currency options" drug Lecture Multinational financial management introduce to you the content: Contract specifications, option positions, hedging using option contract, strategy on currencies option, option pricing. | CHAPTER SEVEND FOREIGN CURRENCY OPTIONS ER OVERVIEW Introduction Contract specifications Option positions Hedging using option contract Strategy on currencies option Option pricing EIGN CURRENCY OPTIONS A foreign currency option is a contract giving the purchaser of the option the right to buy or sell a given amount of currency at a fixed price per unit for a specified time period The most important part of clause is the right but not the obligation to take an action Two basic types of options calls and puts Call - buyer has right to purchase currency Put buyer has right to sell currency The buyer of the option is the holder and the seller of the option is termed the writer 3 LENCY OPTIONS MARKETS Table shows option prices on British pound taken from the online edition of Wall Street Journal on Friday January 31 2007 BRITISH POUND CME 62 500 pounds cents per pound Strike Price Calls Puts Feb Mar Apr Feb Mar Apr 162 2.36 2.94 - 0.16 0.74 - 163 1.5 2.32 2.14 0.3 1.12 2.02 164 0.86 1.7 - 0.66 1.5 - 165 0.5 1.36 1.34 - 2.16 - 166 0.26 1.02 1 - - - 167 0.12 0.76 0.92 - - - 1 CURRENCY Futures Options Also see futures options quotes for AGRICULTURAL OIL I LIVESTOCK I METALSI INTEREST RATE 1 INDEX For Monday September 10r 2012 All prices are settlement prices. Open interest is from the previous trading day. Source AP JAPANESE YEM CME 12 500 000 yen cents per 100 yen Calls Puts Strike Price Oct Dec Mar Oct Dec Mar 1020 25.90 25.90 1050 22.90 22.90 23.05 0.03 1055 22.40 22.40 22.55 0.04 1060 21.90 21.90 22.05 0.04 1065 21.40 21.40 21.55 0.01 0.04 1070 20 90 20 90 21.06 0.01 0.05 1075 20.40 20.40 20.56 0.01 0.06 ô-Nov-15 5 CURRENCY OPTIONS Every option has three different price elements The strike or exercise price is the exchange rate at which the foreign currency can be purchased or sold The premium the cost price or value of the option itself paid at time option is purchased Spot exchange rate in the market CURRENCY OPTIONS Options may also be classified as per their .