37 lines
2.8 KiB
Plaintext
37 lines
2.8 KiB
Plaintext
672 Part V: Index Options and Futures
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Japanese yen. Futures trade in these same currencies on the Chicago Mercantile
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Exchange. Hence, many traders of the physical options use the Chicago-based
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futures as a hedge for their positions.
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Unlike stock options, currency options do not have standardized terms - the
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amount of currency underlying the option contract is not the same in each of the
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cases. The striking price intervals and units of trading are not the same either.
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However, since there are only the six different contracts and since their terms corre
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spond to the details of the futures contracts, these options have had much success.
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The foreign currency markets are some of the largest in the world, and that size is
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reflected in the liquidity of the futures on these currencies.
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The Swiss franc contract will be used to illustrate the workings of the foreign
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currency options. The other types of foreign currency options work in a similar man
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ner, although they are for differing amounts of foreign currency. The amount of for
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eign currency controlled by the foreign currency contract is the unit of trading, just
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as 100 shares of stock is the unit of trading for stock options. The unit of trading for
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the Swiss franc option on the PHLX is 62,500 Swiss francs. Normally, the currency
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itself is quoted in terms of U.S. dollars. For example, a Swiss franc quote of 0.50
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would mean that one Swiss franc is worth 50 cents in U.S. currency.
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Note that when one takes a position in foreign currency options (or futures), he
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is simultaneously taking an opposite position in U.S. dollars. That is, if one owns a
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Swiss franc call, he is long the franc (at least delta long) and is by implication there
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fore short U.S. dollars.
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Striking prices in Swiss options are assigned in one-cent increments and are
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stated in cents, not dollars. That is, if the Swiss franc is trading at 50 cents, then there
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might be striking prices of 48, 49, 50, 51, and 52. Given the unit of trading and the
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striking price in U.S. dollars, one can compute the total dollars involved in a foreign
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currency exercise or assignment.
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Example: Suppose the Swiss franc is trading at 0.50 and there are striking prices of
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48, 50, and 52, representing U.S. cents per Swiss franc. If one were to exercise a call
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with a strike of 48, then the dollars involved in the exercise would be 125,000 (the
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unit of trading) times 0.48 (the strike in U.S. dollars), or $60,000.
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Option premiums are stated in U.S. cents. That is, if a Swiss franc option is
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quoted at 0. 75, its cost is $.0075 times the unit of trading, 125,000, for a total of
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$937.50. Premiums are quoted in hundredths of a point. That is, the next "tick" from
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0.75 would be 0.76. Thus, for the Swiss franc options, each tick or hundredth of a
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point is equal to $12.50 (.0001 x 125,000). |