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    Option

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    manoranjanpatra

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    Option

    Uploaded by

    manoranjanpatra
    177 views7 pages

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    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    177 views7 pages

    Option

    Uploaded by

    manoranjanpatra

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
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    CURRENCY

    OPTIONS
    INTRODUCTION
    A currency option is no different from a stock option
    except that the underlying asset is foreign
    exchange. The basic premises remain the same: the
    buyer of option has the right but no obligation
    to enter into a contract with the seller. Therefore the
    buyer of a currency option has the right, to his
    advantage, to enter into the specified contract
    TERMINOLOGY OF CURRENCY
    OPTIONS
    • Call Option:- A call option will have intrinsic
    value only when the spot price is above the strike price.
    • Put Option:- A put option will have
    intrinsic value only when the spot price is below the strike
    price.
    • Intrinsic Value Of The Option:- Intrinsic
    value is simply the difference between the spot price and the
    strike price.
    • Time Value Of The Option:- When the price of a call or put
    option is greater than its intrinsic value, it is because of its
    time value.
    • Strike Price/ Exercise Price:- The price at which a
    specific derivative contract can be exercised. Strike
    prices is mostly used to describe stock and index options,
    in which strike prices are fixed in the contract. For call
    options, the strike price is where the security can be
    bought (up to the expiration date), while for put options
    the strike price is the price at which shares can be sold.
    • Maturity / Expiry Date:- The date on which an
    option expires and after that date the option can not
    be exercised.
    • American Option:- An option that can be exercised
    anytime during its life.
    • European Option:- An option that can only be
    exercised only after maturity.
    Hedging
    Hedging means reducing or controlling risk. This is
    done by taking a position in the futures market that is
    opposite to the one in the physical market with the
    objective of reducing or limiting risks associated with
    price changes.
    Hedging is a two-step process. A gain or loss in the
    cash position due to changes in price levels will be
    countered by changes in the value of a futures
    position.

    For example:- a wheat farmer can sell wheat futures to


    protect the value of his crop prior to harvest. If there is
    a fall in price, the loss in the cash market position will
    be countered by a gain in futures position
    Valuation Of Options
    Because the values of option contracts depend on a
    number of different variables in addition to the value of the
    underlying asset, they are complex to value. There are
    many pricing models in use, although all essentially
    incorporate the concepts of rational pricing, Moneyness,
    Option time value and Put-call parity
    Determinants Of Valuation Of
    Currency Option
    • The Spot Exchange Rate.
    • The Strike Or Exercise Price.
    • Time To Maturity.
    • Home Currency Risk Free Interest Rate.
    • Foreign Currency Risk Free Interest Rate.
    • Volatility Of The Spot Exchange Rate.

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