Pound Sterling Depreciates
on the settlement dale, the importer will prefer 10 abandon the call option as it is economically cheaper 10 buy the required mount of pounds directly from the exchange market. His total cash outflow will be lower at Rs 157.1 million, (£2 million x R< 77) Premium of Rs 3.1 million, already pd . Thus, it is clear that the importer is not to pay more than R< till’s million irrespective of he exchange rate of £ prevailing on the date of maturity. But he benefits from the favorable movement of the pound. Evidently, currency options are more ideally suited to ‘hedge current c,), risks. Therefore, options markets represent a significant volume of transaction and they are developing at a fast pace. An additional feature of currency options in that they can be repurchased or old before the date of maturity (in the case of American type of options). The intrinsic value of an American call option is given y he positive difference .between the spot rate and the exercise price; in the case of a European call option, the positive difference tween the forward rate and exercise pri c’C 19s the intrinsic value: Intrinsic value (American option) Spot rate – Exercise price 3) Intrinsic value (European option) ‘” Forward rate – Exercise price C3S.4) Of course, the option expires when it is either exerciser or has attained maturity, Normally, it s when the spot rate/forward rate is lower than the exercise price; otherwise soldiers of NS will normally like to exercise their options if they can; positive intrinsic value.