Lecture Multinational financial management - Topic 10: Currency options and hedging. In this chapter, students can use compute the costs, payoff and profits of options and understand how options are used to hedge fx positions. | Topic #10: Currency options and hedging L. Gattis The Pennsylvania State University 1 Finance 407: Multinational Financial Management Poll 2 What is your profit if you take a short position in 5 euro futures contracts at a price of $ and the euro is selling for $ at maturity? Each contract was for €100,000. $7,500 -$7,500 $1,500, -$1,500 None of the above How much was initial margin if the initial margin is 6%? $7,590 $7,500 $37,503 $37,953 None of the above Learning Objectives 3 Learning Objectives Students can use compute the costs, payoff and profits of options and understand how options are used to hedge fx positions Foreign Currency Options 4 A foreign currency option is a contract giving the option purchaser the right, but not the obligation, to buy (Call Option) or sell (Put Option) a given amount of foreign exchange at a fixed price per unit for a specified time period (until the expiration date). Exercise Type: American Option; buyer has the right to exercise the | Topic #10: Currency options and hedging L. Gattis The Pennsylvania State University 1 Finance 407: Multinational Financial Management Poll 2 What is your profit if you take a short position in 5 euro futures contracts at a price of $ and the euro is selling for $ at maturity? Each contract was for €100,000. $7,500 -$7,500 $1,500, -$1,500 None of the above How much was initial margin if the initial margin is 6%? $7,590 $7,500 $37,503 $37,953 None of the above Learning Objectives 3 Learning Objectives Students can use compute the costs, payoff and profits of options and understand how options are used to hedge fx positions Foreign Currency Options 4 A foreign currency option is a contract giving the option purchaser the right, but not the obligation, to buy (Call Option) or sell (Put Option) a given amount of foreign exchange at a fixed price per unit for a specified time period (until the expiration date). Exercise Type: American Option; buyer has the right to exercise the option at any time between the date of writing and the expiration European Option: can be exercised only on the expiration date The option buyer pays the Seller (. writer or grantor) a premium for the option Price Elements of an Option 5 Every option has three different price elements: The exercise or strike price, which is the exchange rate at which foreign currency can be purchased (call) or sold (put). The premium, cost, price, or value of the option itself (paid in advance by the buyer to the seller). The underlying or actual spot exchange rate in the market. Mony-ness 6 An option whose exercise price is the same as the spot price of the underlying currency is said to be at the money (ATM). Strike = Spot An option that would be profitable if exercised immediately is said to be in the money (ITM). ITM Call: Strike Spot “Can sell at a premium” An option that would not be profitable if exercised immediately is referred to as out .
