【正文】 When (Std/f – Ktd/f) ≤0, the option has no intrinsic value or zero intrinsic value. ? Put option intrinsic value when exercised = Max[(Ktd/f Std/f),0] When (Ktd/f Std/f) 0, the option has intrinsic value。 1480 what is gained on one side of the contract price is lost on the other. ? Drawbacks of futures contract The currency exposure cannot exactly match exchange’s contract size. Clients can only partly hedge their exposure. There is a mismatch between maturity of the contract and maturity of the cash flow. Frequent margin calls bring inconvenient for businesses. Currency Options ? An currency option provides investors, hedgers, or speculators with an instrument that have a onesided payoff on a currency transaction. ? An option is a contract that gives its owner the right but not the obligation to buy or sell a given amount of an underlying asset at a fixed price (called “exercise price or strike price”) sometime in the future. ? An option holder is the buyer of the contract and has the choice to execute or abandon the contract. ? An option writer is the seller of the contract and has the obligation once the holder exercises the option. ? The option holder pays the writer an option premium (option price) for the right. ? A currency call option is the right to buy the underlying currency at a strike price and on a specified date. ? The underlying currency is the currency to be granted by an option contract. The currency to be exchanged for the underlying currency is called counter currency. ? For example, a euro option in CME or PSE is the right to buy or sell euro. Euro is the underlying currency and . dollar is the counter currency. ? A currency put option is the right to sell the underlying currency at a strike price and on a specified date. ? If the right can be exercised at any time during the life of the option it is called an American option. ? If the right can be exercised only at the option’s expiration date, it is called a European option. ? Option quotes contract size, maturity, last trading day are all different at different exchanges. Options on CME are American options。Chapter 6 Financial Derivatives for Currency Risk Management Introduction to Financial Derivatives ? Financial derivatives are financial instruments whose values are derived from an underlying asset such as a stock or a currency. ? Derivatives are mainly used to hedge against interest rate and foreign exchange risk. They are also used to speculate. ? Currency forwards, currency futures and options, currency swaps are main derivatives in the derivatives market. Currency Futures ? The violent fluctuations of modity prices led to the creation of futures market. ? The collapse of the Bretton Woods pegged exchange rate system is the main reason for the first currency futures contract. ? Currency futures contract was created to cover the foreign exchange risk. ? A futures contract is an agreement between two parties to buy and sell a currency at a certain future time for a certain price. ? A futures contract remedies the problem inherent in a forward contract. ? The major problem with a forward contract is the default risk. A forward contract is a pure credit instrument. Whichever way the price of the spot rate of exchange moves, one party has an incentive to default. ? For example, if the forward rate is $€, the spot rate on the future delivery day is $€, then the party who sells the euro has the incentive to default. If the future spot rate goes down, the party who buys the euro may default. ? A futures contract is similar to a forward contract, but there are a lot of differences between the two. Forward versus CME Futures Contracts Forwards Exchangetraded futures 1. Location Interbank Exchange floor 2. Maturity Negotiated: typically 1,3,6,12 months or up to 10years The third Monday of March, June, September, December 3. Amount Negotiated: usually more than $5 million Standardized contract amount: such as €125,000 on euros 4. Fees Bidask spread Commissions charged per “round turn”, $30 per contract 5. Counterparty Bank Exchange clearinghouse 6. Collateral Negotiated: depending on customer’s credit risk Initial margin and maintenance margin, marked to market daily 7. Settlement Nearly all Less than 5% settled by physical delivery 8. Trading hours 24 hours During exchange hours Features of Currency Futures ? Futures contracts are standardized contract in terms of the currencies traded, contract size, and maturity of the cont