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CURRENCY OPTION MARKET

CURRENCY OPTION MARKET. TWO TYPES. CURRENCY CALL OPTION CURRENCY PUT OPTION. CALL OPTION. DEFINITION RIGHT TO PURCHASE SPECIFIC CURRENCY SPECIFIC PRICE SPECIFIC PERIOD. T HE INTERNATINAL STANDARDS ORGANIZATION THREE LETTER CODES FOR ALL CURRENCIES. USD : US Dollar

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CURRENCY OPTION MARKET

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  1. CURRENCY OPTION MARKET

  2. TWO TYPES • CURRENCY CALL OPTION • CURRENCY PUT OPTION

  3. CALL OPTION • DEFINITION RIGHT TO PURCHASE SPECIFIC CURRENCY SPECIFIC PRICE SPECIFIC PERIOD

  4. THE INTERNATINAL STANDARDS ORGANIZATIONTHREE LETTER CODES FOR ALL CURRENCIES USD : US Dollar GBA: Grade Britain Pound JPY: Japanese yen CAD: Canadian Dollar DEM: Deutsche marks NLG: Dutch Guilder FRF: French Franc ESP: Spanish Peseta INR: Indian Rupee ITL: Italian Lira SAR: Saudi Riyal AUD: Australian $ EUR: Euro IEP: Irish Pound (Punt) CHF: Swish Franc SEK: Swedish Croner DKK: Danish kroner

  5. On MARCH 31st 2006 British Pound Call Option sells for the Following : • Spot rate $ 1.2735 • No of units : 12500 GBP (IN ONE CONTRACT) • Currency Strike Price June Sept Dec • GBP $1.15 13.80c 14.00c ----- • $1.25 4.00 c 7.00 c ----- • $1.35 0.20 c 2.65 c 4.20 • SUPPOSE U CHOOSE JUNE CALL OPTION

  6. CONTRACT IS EXERCISED IN JUNE • IF IN JUNE SPOT GOES TO $ 1.234 = 1 GBP • CALCULATION : • @ Strike 12500 * 1.25 = $ 15625 PAID • Fees 12500 * 0.04 = $ 500 PAID • @ Spot 12500 *1.234 = $ 15425 REC • TOTAL PAID = $ 16125 (15625+500) • WITHOUT OPTION = $ 15425 • LOSS =$ 700

  7. TRADITIONAL & TRANSACTIONAL OPTIONS • EUROPEAN OPTIONS • AMERICAN OPTIONS

  8. Factors Affecting Call Option Prices • Level of existing spot price relative to strike price. • The higher the existing spot price relative to the strike price the higher will be the option price • Length of time before the settlement date. • Potential variability of currency. • The greater the variability of the currency the greater the chance that the spot rate will be above the strike price.

  9. PUT OPTION • DEFINITION RIGHT TO SELL SPECIFIC CURRENCY SPECIFIC PRICE SPECIFIC PERIOD

  10. Example • On May 31st 2005 British Pound Put Option sells for the Following : • Spot rate $ 1.2735 • No of units : 12500 GBP • Currency Strike Price June Sept Dec • GBP $1.15 0.05c 1.20c 2.75 • $1.25 0.30c 4.35c 7.25 • $1.35 -------- ------- -----

  11. IN SEPTEMBER • CALCULATION

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