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Chap 7: Future and Options on Foreign Exchange - Coggle Diagram
Chap 7: Future and Options on Foreign
Exchange
Futures Contracts: Some Preliminaries
What is forward exchange market?
List of main characteristics of forward exchange market
Currency Futures Markets
Currency Futures Markets
The Chicago Mercantile Exchange
The Intercontinental Exchange (ICE) Futures U.S. (formerly the New York Board of Trade)
The Mexican Derivatives Exchange
The BM&F Exchange in Brazil
The Budapest Commodity Exchange
The Derivatives Market Division of the Korean Exchange
Basic Currency Futures Relationships
Open Interest
refers to the number of contracts outstanding for a particular delivery month.
is a good proxy for demand for a contract.
Options Contracts: Some Preliminaries
An option gives the holder the right, but not the obligation, to buy or sell agiven quantity of an asset in the future, at prices agreed upon today.
Glossary of terms
The asset to be bought or sold is called the underlying asset.
The price agreed upon for buying or selling the underlying asset is called exercise price or strike price.
When the holder of the option decides to buy (sell) the asset at maturity, it is said that he/she is exercising the option.
Options are traded on options exchanges.
The investor selling the option is called the writer or seller.
The investor buying the option is called the buyer or holder.
Since the holder enjoys a privilege - the option to buy or sell - he/she must pay a premium to acquire the option.
The number of outstanding option contracts at any time is called open interest.
Currency Options Markets
If the futures position is not offset prior to its expiration, foreign currency will change hands.
Exercise of a currency futures option results in a long futures position for the holder of a call or the writer of a put.
Exercise of a currency futures option results in a short futures position for the seller of a call or the buyer of a put.
Are an option on a currency futures contract.
Basic Option-Pricing Relationships at Expiration
At expiry, an American call option is worth the same as a European option with the same characteristics.
CaT = CeT = Max[ST- E, 0] (7.2)
Analogously, at expiration a European put and an American put will have the same value. Algebraically, the expiration value can be stated as:
PaT = PeT = Max[E - ST, 0] (7.3)
With an American option, you can do everything that you can do with a European option AND you can exercise prior to expiry—this option to exercise early has value, thus:
PaT > PeT = Max[E - ST, 0] (7.5)
CaT > CeT = Max[ST- E, 0] (7.4)
