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Unit 8: Currency Futures and Currency Options




          appreciates, they can exercise their option by purchasing yen at the strike price and then selling  Notes
          the yen at the prevailing spot rate.
          For every buyer of a currency call option, there must be a seller. A seller of a call option is
          obligated to sell a specified currency at a specified price (the strike price) up to a specified
          expiration date. Sometimes, when the speculators expect the currency to depreciate in the future,
          they may want to sell a currency call option. And the only way a currency call option will be
          exercised will be when the spot rate is higher than the strike price. In this way, when the option
          is purchased, the seller of the currency call option will receive the premium. He can keep the
          entire amount if the option is not exercised. Also, when it appears that an option will be exercised
          there will still be sellers of options. But such options will sell for high premiums because of the
          increased risk of the option being exercised at some point.


                 Example: Suppose that Mr A is a speculator who buys a British pound call option with a
          strike price of $1.50 and a December settlement date. The current spot price as of date is about
          $.012. A pays a premium of $0.12 per unit for call option. Assume there are no brokerage fees.
          Just before the settlement date, the spot rate of the British pound reaches $1.51. At this time,
          A exercises the call option and then immediately sells the pounds at the spot rate to a bank. To
          determine A’s profit or loss, we will first compute his revenues from selling the currency, then
          subtract from this amount the purchase price of pounds when exercising the option and also
          subtract the purchase price of the option. The computations are as follows. Assume one option
          contract specifies 32,000 units.
                                         Per Unit              Per Contract
           Selling price of pound         $1.51      48,320 ($1.51 × 32,000 units)
           –Purchase price of pound       –$1.50     –$ 48,000 ($1.50 × 32,000 units)
           –Premium paid for option       –$0.12     –$ 384 ($.012 × 32,000 units)
           =Net profit                    –$.002     –$64 (–$.002 × 32,000 units)
          Assume that B was the seller of the call option purchased by A. Also assume that B would only
          purchase British pounds if and when the option was exercised at which time he must provide the
          pounds at the exercise price of $1.50. Using the information in this example, B’s net profit from
          selling the call option is derived below:
                                          Per Unit              Per Contract
           Selling price of pound          $ 1.50    $48,000 ($1.50 × 32,000 units)
           –Purchase price of pound       –$ 1.51    $48,320 ($1.51 × 32.000 units)
           –Premium received              +$.012     +$384 ($.012 × 32,000 units)
           =Net profit                     $.002     $642 ($.002 × 32,000 units)
          As a second example, assume the following information:

               Call option premium on Swiss francs (SF) = $.01 per unit
               Strike price = $.44
               1 option contract represents SF 62,500.
          A speculator who had purchased this call option decided to exercise shortly before the expiration
          date. When the spot rate reached $.49, the francs were immediately sold in the spot market by
          the speculator. Given this information, the net profit to the speculator was:
                                          Per Unit              Per Contract
           Selling price of SF             $.49      $ 30,625 ($.49 × 62,500 units)
           –Purchase price of SF           –$.44     –$27,500 ($ .44 × 62,500 units)
           –Premium paid for option        –$.01     + $625 ($.01 × 62,500 units)
           =Net profit                     $.04      $2,500 ($.04 × 62,500 units)




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