Foreign Currency Options In the past three decades,the use of foreign currency options as a hedging tool and for speculative purposes has blossomed into a major foreign exchange activity Options on the over-the-counter (OTC) market can be tailored to the specific needs of the firm but can expose the firm to counterparty risk. Options on organized exchanges are standardized,but counterparty risk is substantially reduced
Foreign Currency Options In the past three decades, the use of foreign currency options as a hedging tool and for speculative purposes has blossomed into a major foreign exchange activity. Options on the over-the-counter (OTC) market can be tailored to the specific needs of the firm but can expose the firm to counterparty risk. Options on organized exchanges are standardized, but counterparty risk is substantially reduced
Payoff for Buyer of a call Assume purchase of August call option on Swiss francs with strike price of 58%($0.5850/SF),and a premium of $0.005/SF At all spot rates below the strike price of 58.5,the purchase of the option would choose not to exercise because it would be cheaper to purchase SF on the open market At all spot rates above the strike price,the option purchaser would exercise the option,purchase SF at the strike price and sell them into the market netting a profit (less the option premium)
Payoff for Buyer of a call Assume purchase of August call option on Swiss francs with strike price of 58½ ($0.5850/SF), and a premium of $0.005/SF At all spot rates below the strike price of 58.5, the purchase of the option would choose not to exercise because it would be cheaper to purchase SF on the open market At all spot rates above the strike price, the option purchaser would exercise the option, purchase SF at the strike price and sell them into the market netting a profit (less the option premium)