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Currency Option

In: Business and Management

Submitted By CLMY92
Words 580
Pages 3
1. Managing Currency—Currency Options
Let’s based on Figure 1.1 Option Chain for NASDAQ OMX call option below, we will do a call option example. Figure 1.1: Option Chain for NAZDA OMX Group Inc.
(Taken and Compiled from Figure 1.2: Option Chain for NASDAQ OMX Group Inc. (NDAQ) in Appendix A)

Both calls and puts option will be based on the option of striking price at 32 cent/AUD, expires on September 2013 and a contract size is AUD10,000.

1.1 Call Option
Premium price=2 cents/AUD
Supposed that the spot rate at expiration (in cents), ST = 40 cents/AUD

Exercise value = ST– Strike price = 40 – 32 = 8 cents per contract or $800.

Thus, the call owner will be able to purchase AUD10,000 worth $4,000 (=AUD10,000 X $0.40) in the spot market, for $3, 200 (=AUD10,000 X $0.32).

But if the Spot rate at the expiration is lower than the strike price, and causing a negative exercise value, the caller buyer has no obligation to exercise as it will be a disadvantage. He/she can either let it expire or zero value. Below in Diagram 1.1 graph illustrates the 32 Sept AUD call option from the buyer’s perspective at the expiration. As shown above, in the buyer’s perspective, he/she should not lose any amount over the premium when the Spot rate is higher than the Strike price and in theory the buyer will have an infinite gains.

When it reaches the spot rate at expiration which is ST = E+p = 32+2 = 34 cents/AUD, both the buyer and the writer have gain or lose.

1.2 Put Option
Premium = 1.50cents/AUD
Supposed that the spot rate at expiration (ST) = $0.30/AUD

Exercise Value = Strike price - ST = 32 – 30 = 2 cents per contract of AUD10,000 or $200.

This means that the put writer will be able to sell AUD10,000, worth $3,000 (= AUD10,000 X $0.30) in the spot market, for $3,200 (= AUD10,000 X…...

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