Call Option Homework Help

Call Option

In a call option the holder has the right to buy/call a specific currency at a specific price on a specific maturity date or within a  classified period of time’, However, the holder of the option is under no obligation to buy the currency, Such an option is to I~   exercised only when, the actual price in the forex market, at the time of the exercising option, is more than the price specified in   all option contract. To put it differently, the holder of the option obviously will not use the call option in case the actual currency   rice in the spot market, at the time of using the option, turns out to be lower than the specified 10 the t311 option contract,

Put Option

A put option confers the right hut no obligation to s~1 a specified amount of currency at a per-fixed price on or up to a specified  ate, Obviously, put options will he exercised when  when the actual exchange rate on the date of maturity is lower than the rate  specified   n the put option contract,  The option contracts place their holders in a very favorable/privileged position for the following two   seasons: (i) they hedge foreign exchange risk of adverse movements in exchange rates and <lj) they retain the advantage of the   favorable movement of exchange rates, Given the advantages of option contracts, the cost of currency option (which is limited to  he amount of premium; it may  , be absolute sum but normally expressed as a peen~nag~ of the spot rate prevailing at the time of    entering into a contract) seems to IX’ worth incurring.

In contrast, the seller of the option contract runs the risk of  unlimited/substantial loss and the amount of premium he receives is income to  him, Evidently, between the buyer and seller of  all   option contracts, the risk of a currency option seller is/seems to be relatively much higher than that of a buyer of such an option. , In view of high potential risk to, the sellers of these currency options, option contracts are  primarily dealt in the major  currencies of the world that are actively traded in the over-the-counter   (OTC market. All the operations on the OTC option   rket”  rc carried out virtually round the clock. The buyer of the option pays the option peke (referred to as premium; upfront at the time of entering an option contract with the seller of the option (known as the u-righter of the option). The  predetermined price at  which the huger of the option (also called as the holder of  exercise his option to buy/sell currency is called the   trike exercise price,

\X’hen the option can he exercised only on the maturity date, it is called an European. option; in contrast,  hen the option can he exercised on any date upro mall ifY. it is referred to as an American option, An  option is said to he In- one, if its immediate exercise yields a positive value to its holder, in  Glse the strike price is equal to the spot price, the option is  aid to he at-money; when option has no positive value, it is said out-of-money. Example ,~”A illustrates currency option,  An  Indian importer I~ required to, pay Virile,h ,Honolulu to a L’I\ company in .j month, time, To Ru;”,1 “Ra inst  the Popsicle  appreciation of the pound sterling, he hup an option hy paynE 2 pc..r ecru premium on’ the current prices, The spot rate IS Rs  The suite price, is [fixed at R, 7IUO!.L The Indian impon«:r wi:1 n ‘ed .{2 million in 4 months. In casco. the pound sterling   appreciates April the rupee, the sooner “”i have: to spend  Preliterate,tantamount [

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