34 lines
2.5 KiB
Plaintext
34 lines
2.5 KiB
Plaintext
Chapter 34: Futures and Futures Options 673
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Actual delivery of the security to satisfy an assignment notice must occur with
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in the country of origin. That is, the seller of the currency must make arrangements
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to deliver the currency in its country of origin. On exercise or assignment, sellers of
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currency would be put holders who exercise or call writers who are assigned. Thus,
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if one were short Swiss franc calls and he were assigned, he would have to deliver
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Swiss francs into a bank in Switzerland. This essentially means that there have to be
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agreements between your firm or your broker and foreign banks if you expect to
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exercise or be assigned. The actual payment for the exercise or assignment takes
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place between the broker and the Options Clearing Corporation (OCC) in U.S. dol
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lars. The OCC then can receive or deliver the currency in its country of origin, since
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OCC has arrangements with banks in each country.
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EXERCISE AND ASSIGNMENT
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The currency options that trade on the PHLX (Philadelphia Exchange) have exercise
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privileges similar to those for all other options that we have studied: They can be
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exercised at any time during their life.
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Even though PHLX currency options are "cash" options in the most literal
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sense of the word, they do not expose the writer to the same risks of early assignment
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that cash-based index options do.
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Example: Suppose that a currency trader has established the following spread on the
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PHLX: long Swiss franc December 50 puts, short Swiss franc December 52 puts - a
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bullish spread. As in any one-to-one spread, there is limited risk. However, the dol
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lar rallies and the Swiss franc falls, pushing the exchange rate down to 48 cents (U.S.)
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per Swiss franc. Now the puts that were wri,tten - the December 52 contracts - are
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deeply in-the-money and might be subject to early assignment, as would any deeply
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in-the-money put if it were trading at a discount.
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Suppose the trader learns that he has indeed been assigned on his short puts.
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He still has a hedge, for he is long the December 50 puts and he is now long Swiss
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francs. This is still a hedged position, and he still has the same limited risk as he did
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when he started (plus possibly some costs involved in taking physical delivery of the
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francs). This situation is essentially the same as that of a spreader in stock or futures
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options, who would still be hedged after an assignment because he would have
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acquired the stock or future. Contrast this to the cash-based index option, in which
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there is no longer a hedge after an assignment. |