Currency Option Contracts

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Currency Option Contracts
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Terminology

• Options Contract An option is a contract that
  gives the holder the right (Not the Obligation)
  to Buy or sell currency in the future for a pre
  specified price.
• Option writer The option writer is the person or
  institution that sells the option.
• Option Premium Is the option price, it is what
  the buyer pays, upfront, for the right to
  Buy/Sell currency in the future at a set price.
• Maturity Date also call the Expiration Date or
  Expiry. This is the date when the option expires.
• Exercise If the option holder decides to execute
  the option and buy or sell currency at the
  contract price, then the option is said to be
  exercised.
• Early Exercise Refers to an American option
  being exercised before the maturity date.

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Terminology

• Strike Price The FX rate specified in the
  contract that the option holder can buy or sell
  currency at.
• Option Types

• Call Option Gives the holder the right to BUY
  the specified currency at the strike price on or
  before the maturity date.
• Put Option Gives the option holder the right to
  sell the specified currency at the strike price,
  on or before the maturity date
• European Option Gives the option holder the
  right to buy/sell the currency at but not before
  the maturity date.
• American Option Gives the option holder the
  right to buy/sell currency any time before or on
  the maturity date.

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Types of options Graphically
American Call Options
American Options
American Put Options
Options Contracts
European Call Options
European Options
European Put Options
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Terminology

• In the money Refers to a call (put) option when
  the spot price is above (below) the strike price.
• Out of the money Refers to a call (put) option
  when the spot price is below (above) the strike
  price.
• At the money Refer to a call or put when the
  strike price equals the spot price.

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Payoff Diagrams for options
Call Option
At the money
k
In the money
Out of the money
Put Option
At the money
k
Out of the money
In the money
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Exam Distribution
Mean 75.14 Adjusted Mean 82.17