Options contracts
Simply stated, an option contract is a choice. The holder of the option has the right but not the obligation to buy or ll a fixed amount of currency at a fixed rate of exchange at a predetermined date
in the future. It is entirely up to that buyer whether or not to exerci that right (that is take up the right of the option), only the ller of the option is obligated to perform. The option holder (buyer) can therefore choo the better price – either from the prevailing market price at the time, or the price specified in the option. An option can be regarded as a form of insurance; if the market moves against you, you will be protected and can still take advantage of better prices should the market move in your favour.
Types of options contracts
Two types may be bought and sold:
assuranceCall options give the buyer the right to buy the underlying currency. The holder of a call option has the right to buy the underlying currency, while the ller of the call option has the obligation to ll the underlying currency if and when the holder thereof takes up the right.
Put options give the buyer the right to ll the underlying currency. The holder of a put option has the right to ll the underlying currency, while the ller of the put option has the obligation to buy the underlying currency if and when the holder thereof takes up the right.
In a foreign exchange transaction, one currency is bought, while another is simultaneously sold. An option to buy US dollars against the SA rand (USD Call) is an option to ll SA rand against the US dollar (Rand Put). In every foreign exchange transaction, one currency is purchad and another currency is sold. Conquently, every currency option is both a call and a put.
Importers:
Buy call If either option is exercid, Client buys currency
Sell put Exporters:
Buy call If either option is exercid, Client buys currency Sell put Currency options may be quoted in one of two ways: American terms, in which a currency is quoted in terms of the US dollar per unit of foreign currency; and European terms, in which the US dollar is quoted in terms of units of foreign currency per US dollar.
A European style option may be exercid on the expiration date of the option only, while American style options may be exercid at any time up to and including the expiration date.
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Options terminology
• Buyer (Holder): The owner of the option contract.
• Premium: When options are bought, the premium (cost of the option) has to be paid at the time of purcha that is up front. The actual amount of the premium depends on a number of factors, which take into account how likely it will be that the option will be exercid (takes up the right of the option). The premium is a percentage of the value of the underlying currency and reprents compensation to the ller for the risk involved with the option contract over the option period.
• Exerci: To exerci the option means to call upon the right granted in terms of the option. The buyer (holder) will be the party exercising the option.
• Strike price/Exerci price (Rate): This is the price (rate) at which the buyer (holder) of the option is entitled to either buy or ll the underlying currency. The strike price is determined at the time the option is purchad.
• Expiry/Expiration date: The final date at which the option may be exercid in terms of the option contract that is the day on which the option expires.
Options pricing dynamics
An option contract, from a buyer’s point of view is the same as buying an insurance policy. In the same way that insurance premiums are bad on the probability of a claim being made, the price of an option also reprents the measure of risk which will be assumed by the ller of the contract. The option value or premium, can be split into two components – Intrinsic value and Time value.
Intrinsic value
This reprents the amount of money, if any, that could currently be realid by exercising an option with a given strike price. For example, a call option has intrinsic value if its strike price is below the spot exchange rate. A put option has intrinsic value if its strike price is above the spot exchange rate.
In-the-Money: This term is applied to an option that has intrinsic value. That is when a profit can be realid upon exercising it. For a call option, it is the ca when the spot exchange rate is higher than the strike price of the option, and for a put option, when the spot exchange rate is below the strike price.
Out-of-the-Money: A call option is said to be “out-of-the-money” if the underlying spot exchange rate i
s currently less than the strike price of the option. A put option is said to be “out-of-the-money” if the underlying spot exchange rate is currently more than the strike price of the option. An option that is “out-of-the-money” at expiry will have no value, and the holder of the option will allow it to expire worthless.
At-the-Money: This means that the strike price and the spot exchange rate are the same. Like the “out-of-the-money” option, the holder would allow the option to expire.
Shown in table form:
Option type Spot exchange rate is greater than
strike price
Spot exchange rate is equal to
strike price
Spot exchange rate is less than
strike price
Calls In-the-Money At-the-Money Out-of-the-Money
Puts Out-of-the-Money At-the-Money In-the-Money
Time value
Time value is a little more complex. When the price of a put or call option is greater than its intrinsic value, it is becau the option has time value. Time value is determined by: the spot price; the volatility of the underlying currency; the exerci price; the time to expiration; and the difference in the ‘risk-free’ rate of interest that can be earned by the two currencies. The time value of the option contract will diminish over the life of the option and at expiration will be zero. The time value portion of an option is at its greatest when the option is “at-the-money, that is, the strike (exerci) rate is equal to the market rate. This is becau the entire premium is equal to time value, as the option has no intrinsic value.
Shown in table form:
Option type Spot exchange rate is greater than
strike price
Spot exchange rate is equal to
strike price
In-the-Money>50%Intrinsic value plus time value
At-the-Money50%Only time value
Out-of-the-Money<50%Less time value than “at-the-money”
Key features of options
1. Flexibility: Once a company has determined their risk management goals, options can very often be ud to
achieve them. The solution will always involve a risk vs. return trade off and the company itlf will determine the degree of protection required in respect of the premium involved and the benefits (or upside potential) retained. Thus, the company has the ability to t the strike rate and the maturity to suit particular and specific requirements.
2. Combining long and short positions: Long and short positions can be combined on put and call options to create
pay-offs which specifically fit the underlying exposure.
Applications
Exporter
Vanilla options: Buy USD Put/ZAR Call
艺术游学Definition An exporter acquires the right but not the obligation to ll a fixed quantity of USD at a specified rate on
a specified date.
Why u Offers protection against adver movements in the exchange rate and introduces flexibility.
When to u The expectation that the spot rate may be above the forward rate at maturity. This strategy gives an
exporter protection against an appreciating exchange rate while allowing unlimited participation in a depreciating exchange rate.
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Opportunity cost The cost is limited to the premium paid while retaining unlimited potential benefit.
Premium Premium payable, value spot.
Strike levels This strategy is flexible and the exporter can t the strike at any level. Note: The higher the strike the higher the premium.
Optionality An exporter has the right to enforce the contract to exchange currency for one another but will not exerci the option if it is more beneficial to deal in the spot market.
USD Put/ZAR Call
Spot: 5.9000
Fwd: 5.9700 (3 months)
Strike: 5.9700 (ATMF) 5.9700 Premium: 22.64 ZAR cents per USD Breakeven: 6.1964
Worst Ca: 5.7436 Sell USD @ Spot
Participation
Breakeven: 6.1964
沈阳英语翻译FWD
Worst ca: 5.7436
Protection
Sell USD @ 5.9700
On maturity
Spot rate higher than strike rate: Spot rate lower than strike rate:The option would expire worthless and would not be exercid. The exporter would ll USD in the spot market at the higher rate and effectively receives the spot rate minus initial premium. The exporter would exerci the option and ll USD at the strike rate. The exporter effectively receives the strike rate minus initial premium.
Breakeven defined The breakeven rate is the level of spot where the USD Put/ZAR Call outperforms forward cover. The exporter should hold the view that he would reali a rate better than the breakeven level otherwi it would have been better to have hedged via the FEC.
Types European and American
Other types of export options
Collar: Export zero cost: Provides an exporter with a trading range, which protects against adver appreciation of the currency, while limiting potential participation in favourable depreciation of the currency. This provides flexibility in management of export exposures. The collar offers a zero premium hedge where the spot rate is expected to be higher than the forward rate at maturity.
Step-up Option: Step-Up Forward: Allows an exporter to achieve an effective rate better than the forward rate. Ud to achieve export rates at a premium to the forward rate. This structure suits an exporter with regular commitments and offers a fixed rate, which is higher then the current forward rate.
Export participation option: Allows for participation in favourable exchange rate movements. Provide
高中语文课本电子版s protection and introduces flexibility. U when your view is that the spot rate may be above the forward rate at maturity.
Geared export collar: Provides an exporter with a range which protects against an adver appreciation of
the currency while limiting potential participation in a favourable currency depreciation. Provides flexibility in management of export exposures. This structure suits an exporter with regular commitments and is applicable when the spot rate is expected to be higher than the forward rate at maturity.
Importer
Buy USD Call / ZAR Put
Definition An importer acquires the right but not the obligation to buy a fixed quantity of USD at a
specified rate on a specified date.
Why u Offers protection against adver movements in the exchange rate and introduces flexibility.
When to u When the expectation is that the spot rate may be below the forward rate at maturity. This
strategy gives an importer protection against an depreciating exchange rate while allowing
unlimited participation in a appreciation of the exchange rate.
Opportunity cost The cost is limited to the premium paid while retaining unlimited potential benefit.
Premium Premium payable, value spot.
Strike levels This strategy is flexible and the importer can t the strike at any level. Note: The lower the
strike the higher the premium.
cmcc是什么意思Optionality An importer has the right to enforce the contract to exchange currency for one another but will
not exerci the option if it is more beneficial to deal in the spot market.
interrelationship
Disclaimer
This document does not constitute an offer, or the solicitation of an offer for the sale or purcha of any investment or curity. This is a commercial communication. If you are in any doubt about the contents of this document or the investment to which this document relates you should consult a person who specialis in advising on the acquisition of such curities. While every care has been taken in preparing this document, no reprentation, warranty or undertaking (express or implied) is given and no responsibility or liability is accepted by Standard Bank Group Limited, its subsidiaries, holding companies or affiliates as to the accuracy or completeness of the information contained herein. All opinions and estimates contained in this report may be changed after publication at any time without notice. Members of Standard Bank Group Limited, their directors, officers and employees may have a long or short position in currencies or curities mentioned in this report or related investments, and may add to, dispo of or effect transactions in such currencies, curities or investments for their own account and may perform or ek to perform advisory or banking rvices in relation thereto. No liability is accepted whatsoever for any direct or conquential loss arising from the u of this document. This document is not intended for the u of private customers. This document must not be acted on or relied on by persons who are private customers.
广州粤语培训Any investment or investment activity to which this document relates is only available to persons other than private customers and will be engaged in only with such persons. In European Union countries this document has been issued to persons who are investment professionals (or equivalent) in their home jurisdictions. Neither this document nor any copy of it nor any statement herein may be taken or transmitted into the United States or distributed, directly or indirectly, in the United States or to any U.S. person except where tho U.S. persons are, or are believed to be, qualified institutions acting in their capacity as holders of fiduciary accounts for the benefit or account of non-U.S. persons; The distribution of this document and the offering, sale and delivery of curities in certain jurisdictions may be restricted by law. Persons into who posssion this document comes are required by Standard Bank Group Limited to inform themlves about and to obrve any such restrictions. You are to rely on your own independent appraisal of and investigations into (a) the condition, creditworthiness, affairs, status and nature of any issuer or obligor referred to and (b) all other matters and things contemplated by this document. This document has been nt to you for your information and may not be reproduced or redistributed to any other person. By accepting this document, you agree to be bound by the foregoing limitations. Unauthorid u or disclosure of this document is strictly prohibited. Copyright 2004 Standard Bank Group. All rights rerved.
Authorid financial rvices and registered credit provider (NCRCP15)
The Standard Bank of South Africa Limited (Reg. No. 1962/000738/06). SBSA 144910-5/13On maturity
Spot rate lower than strike rate:
Spot rate higher than strike rate:The option would expire worthless and would not be exercid. The exporter would purcha USD in the spot market at the lower rate and effectively pay the spot rate minus initial premium.The importer would exerci the option and purcha USD at the strike rate. The importer
effectively pays the strike rate minus initial premium.
Breakeven defined The breakeven rate is the level of spot where the USD Call/ZAR Put outperforms forward cover.
The importer should hold the view that he would reali a rate better than the breakeven level
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otherwi it would have been better to have hedged via the FEC.
Types
European and American Other types of import options
Step-Up Option: Step-Up Forward: Allows importers to achieve an effective rate better than the forward rate. Ud to achieve import rates at a discount to the forward rate. This structure suits an importer with regular commitments and offers rates which are lower than the current forwards.
Import participation option: Allows for participation in favourable exchange rate movements. Provides protection and introduces flexibility. U when you take the view that the spot rate may be below the forward rate at maturity.Contact details
For further information on any of our products or rvices:
Forex Relationship Centre
Corporate and Investment Banking Division
Standard Bank
Toll-free tel: 08000-FOREX(36739)
Fax: 011 378 8060
USD Put/ZAR Call
Spot: 5.9500
Fwd:
6.0200 (3 months)Strike:
6.0200 (ATMF) 6.0200Premium: 22.87 ZAR cents per USD Breakeven: 5.7913
Worst Ca: 6.2487 Sell USD @ Spot 6.0200Protection
Worst ca: 6.2487FWD
Breakeven: 5.7913Participation
Sell USD @ Spot
