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Lecture International finance: An analytical approach (3/e): Chapter 10 - Imad A. Moosa

Chapter 10 - Currency options. In this chapter, the learning objectives are: To introduce basic concepts, to outline the differences between OTC and exchange-traded options, to describe option positions, to identify the determinants of option premiums, to describe exotic currency options. | Lecture International finance An analytical approach 3 e Chapter 10 - Imad A. Moosa Chapter 10 Currency Options Objectives To introduce basic concepts To outline the differences between OTC and exchange-traded options To describe option positions To identify the determinants of option premiums To describe exotic currency options Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t a International Finance An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 10-2 Definition A currency option is a contract that gives its holder the right to buy or sell on or by a specified date an amount of a currency at a predetermined exchange rate Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t a International Finance An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 10-3 Options writers and holders The writer sells the holder the right to buy or sell the underlying currency The price paid up front is called the premium Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t a International Finance An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 10-4 Payment and settlement dates The premium payment date is the date on which the premium is due The settlement date is the date on which delivery of the underlying currency is required Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t a International Finance An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 10-5 Call and put options A call option gives the holder the right to buy the underlying currency A put option gives the holder the right to sell the underlying currency Copyright 2010 McGraw-Hill Australia Pty Ltd PPTs t a International Finance An Analytical Approach 3e by Imad A. Moosa Slides prepared by Afaf Moosa 10-6 The mechanics of call and put options on the Australian dollar Call Put a Initial exchange Writer Holder Writer Holder Premium USD Premium USD b Exercise AUD AUD Writer Holder Writer Holder USD USD Copyright 2010 McGraw-Hill