Lecture 5 - FOREX Derivatives 2 Flashcards
What are currency options?
Grant the purchaser the right (not the obligation) to buy/sell a specific currency (underlying currency vs counter currency) at a predetermined price (called the exercise or strike price) sometime in the future.
What is underlying currency?
Currency in which the option is granted.
What is current currency?
Currency to be exchanged.
Who is the writer?
The seller of the option.
Who is the holder?
Purchaser of the option.
What is the currency call option?
Gives the right to purchase the underlying currency.
What is the currency put option?
Sell the underlying currency.
What is the option premium?
Price paid by the holder to the writer.
American options can be exercised at any time up to…
Maturity.
European options can only be exercised on the…
Expiration date.
What are the differences between hedging and speculation?
- With speculation, we trade currencies in order to make a profit. We do not need to make or receive payments in foreign currencies.
- In speculation, we welcome the fact that the exchange rate changes as opposed to hedging, where we try to lock in the exchange rate without further proposes.
How do we trade currencies in order to gain profit with speculation?
We make our trade in based on our expectations with respect to future scenarios of the exchange rate, in order to profit from the changes in the exchange rate.
What is speculative capital?
The amount we are willing to put entirely at risk.
What is a currency swap?
An agreement between two parties to exchange two differing forms of payment obligations denominated in two different currencies.
