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A word of caution financial derivatives are powerful tools in the hands of careful and competent financial managers. They can also be very destructive devices when used recklessly.
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Commissions customers pay a commission to their broker to execute a round turn and only a single price is quoted Use of a clearing house as a counterparty All contracts are agreements between the client and the exchange clearing house. Consequently clients need not worry about the performance of a specific counterparty since the clearing house is guaranteed by all members of the exchange
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Using the settle price from the table and assuming a spot rate of $.09500/Ps at maturity, Ambers profit is
Value = -Ps 500,000 ($0.09500/ Ps - $.10958/ Ps) = $7,290
Copyright 2009 Pearson Prentice Hall. All rights reserved.
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Using the settle price from the table and assuming a spot rate of $.11000/Ps at maturity, Ambers profit is
Value = Ps 500,000 ($0.11000/ Ps - $.10958/ Ps) = $210
Copyright 2009 Pearson Prentice Hall. All rights reserved.
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The buyer of the option is the holder and the seller of the option is termed the writer
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Exhibit 8.8 Analysis of Call Option on British Pounds with a Strike Price = $1.70/
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Exhibit 8.9 The Intrinsic, Time, and Total Value Components of the 90-Day Call Option on British Pounds at Varying Spot Exchange Rates
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Currency option valuation is a complex combination of the current spot rate, the specific strike price, the forward rate, currency volatility and time to maturity The total value of an option is the sum of its intrinsic and time value.
Intrinsic value depends on the relationship between the options strike price and the spot rate at any single point in time, whereas time value estimates how the intrinsic value may change prior to the options maturity
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