5014 - Finance of International Trade - Options - p163 - 193 Flashcards
Currency Options
Gives the purchaser the option of whether or not to buy or sell the currency
Benefits of Currency Options
- Have the right but not the obligation to pay compared to a forward where you have to pay agreed rate
- Options fix the most you will give and least you will receive plus has profit potential
Limitations of Currency Options
- Options come at a cost known as a premium
- Premiums may be 2-5% of the amount exchanged
- Premiums are payable at the beginning so cashflow problem and opportunity cost
- Works like an insurance policy which you may or may not use
Puts - Put Options
A Put option gives you the right but not the obligation to SELL
Calls - Call Option
A Call option gives you the right but not the obligation to BUY
Option Forward Exchange Contract
Firm and binding contract that must be exercised at some point during the option period, purchaser has option when to exercise the contract
Call and Puts are….
Call = Buy Put = Sell
Purchaser/Holder
- Purchaser/Holder is the person who owns the option
Writer
- A bank or exchange who writes the options contract
Difference between purchaser/holder and writier
Purchaser has the right to choose whether or not to exercise the option
Writer has no rights
American Options
Can be exercised on or before expiry date
European Options
Must be exercised on a set date
Traded Options
Options traded on markets and are negotiable so purchaser can sell the option to someone else
Over the Counter Options
Cannot be traded, are a contact between the original buyer and seller
Difference between Traded Options and Over the Counter Options
As name suggests traded options can be trades, otc options cannot
