OPTIONS &FUTURES

Published on May 2016 | Categories: Documents | Downloads: 63 | Comments: 0 | Views: 468
of 32
Download PDF   Embed   Report

Comments

Content

Name of Institution

Name of Institution
Programme, Semester number Course Name of Faculty

1

Currency Options
± Options market ‡ Listed currency options market
± ± ± ± ±

Name of Institution

First exchange in Philadelphia Standardised contracts Clearing house ( CH) an essential part For options buyer-CH is a seller and for for seller of options it is buyer Margin money + specific % of underlying currency is deposited by a writer of the options in case he does not have sufficient funds to purchase the currency if option is exercised. ± Maturity is fixed. Expirations months are March, June, Sept, Dec ± Expiration day is Friday preceding the third Wednesday.

‡ OTC options market ‡ Also known as inter bank currency options market. ‡ Located in NY and London

Currency Options
‡ ‡ ‡ ‡ ‡

Name of Institution

OTC options market Size of TXN much larger than Listed Exchange. Place for European Options Contract size is standardised. Commercial banks/Investment banks write options for the client and to offset their exposure transact currency options on the listed stock exchanges.

Currency Options

Name of Institution

‡ An option gives it¶s holder a right to buy/sell an asset in future at a price that is agreed upon today ‡ Used to cover exchange risks and permits a holder to take advantage of a favouarble evolution of exchange rate. ‡ Call options ± Holder has a right to buy an asset in future at a price ( strike price) that is agreed upon today ± Seller of a call option has the obligation to sell the asset at the predetermined price.

Currency Options

Name of Institution

‡ Put option ± holder has a right to sell an asset in future at a price ( strike price) that is agreed upon today ± Seller of a put option has the obligation to buy the asset at the predetermined price. ‡ Both options are of two types-American and European ± In American option , option can be exercised before maturity.

OTER TYPES OPTIONS
‡ FORWARD REVERSING

Name of Institution

± CALL OPTION PREMIUM PAID ONLY IF SPOT RATE IS BELOW A SPECIFIED LEVEL ± PREMIUM QUOTED BY SELLER
‡ WHO CHARGES PREMIUM ONLY WHEN OPTION IS NOT EXERCISED

‡ PREFERENCE
± PRIVILEGETO DESIGNATE OPTION AS EITHER CALL/PUT AFTER LAPSE OF SPECIFIED PERIOD

‡ AVERAGE
± ARITHMETIC AVG OF SPOT RATE DURING LIFE OF OPTION

‡ LOOK BACK
± RIGHT TO BUY/SELL AT MOST FAVOURABLE ER REALISED OVER THE LIFE OF OPTION

Name of Institution

‡ CYLINDER/TUNNEL
± TWO STRIKE RATES

‡ BARRIER
± DOWN AND OUT²OPTION EXPIRES IF SPOT RATE REACHES A LEVEL MENTIONED IN THE CONTRACT ± DOWN AND IN²OPTION IS ACTIVATED IF SPOT RATE REACHES A LEVEL MENTIONED IN THE CONTRACT

‡ BASKET
± BUYERS CONFRONTED WITH FEX RISK IN RESPECT OF MANY CURRENCIES

TERMS
‡ ‡ ‡ ‡ ‡ OPTION BUYER OPTION SELLER CALL/ PUT STRIKE PRICE/ EXERCISE PRICE AT MONEY
± STRIKE PRICE=SPOT PRICE

Name of Institution

‡ IN MONEY( CALL)
± STRIKE PRICE<SPOT PRICE ± PUT-SPOT PRICE<STRIKE PRICE

‡ OUT OF MONEY=OPPOSITE OF IN MONEY ‡ PREMIUM=SUMOF INTRINSIC AND TIME VALUE

Currency Options

Name of Institution

‡ Option ±Premium ‡ Premium or Option value or option price is the value an option buyer pays to the option seller/option writer at the time of signing a contract. ‡ It is equal to sum of it¶s intrinsic and Time value. ‡ Intrinsic value ± Represents gains accruing to the holder on exercising the option ± For call option ±Spot > strike price ± For put Option²Spot <Strike Price

Currency Options

Name of Institution

‡ Time value ± Represents an amount a buyer of an option is ready to pay over and above the Intrinsic Value. Difference between Total amount of premium and intrinsic value. ‡ Gains/Losses ± Buyer of an option -Gains unlimited. Loss limited to premium ± Seller of an option-Loss unlimited-Gain limited to amount of premium received.

Name of Institution

‡ Time value of an option exists ±spot rate expected to move in ³in money position´ between signing of the contract and the maturity date.
± On maturity date time value=0 and premium represented by intrinsic value.At money position there is no intrinsic value and option premium represented by time value ± Between these positions premium represented by intrinsic and time value partly

‡ Euro -Strike price call option -60.premium 0.05 and spot rate 60.02 ‡ Premium=0.05 *62500=3125 ‡ IV=(60.02-60)*62500=1250 AND TV=3125-1250=1875

Currency Options

Name of Institution

‡ Gains/Losses ± Buyer of an option -Gains unlimited. Loss limited to premium ‡ Call Options ±Gain =Spot-Strike ±Premium ±For seller of option-if buyer does not exercise the option , gain =premium »If buyer exercises the optionloss=excess of pot price over the strike price.

Currency Options

Name of Institution

‡ Put Option ± Gain =Strike ±Spot-Premium ± For seller of option-if buyer does not exercise the option , gain =premium ± If buyer exercises the option-loss=excess of pot price over the strike price For seller of option-if buyer does not exercise the option , gain =premium » If buyer exercises the option-loss=how much lower the spot price is from the strike price. ± Seller of an option-Loss unlimited-Gain limited to amount of premium received.

HEDGING

Name of Institution

‡ PURCHASE OF OPTIONS ‡ IMPORTER IMPORTING GOODS WORTH EURO 62500, AMOUNT TO BE PAID AFTER 2 MONTHS. ‡ BUYS A CALL OPTION IF EURO IS EXPECTED TO RISE ‡ STRIKE PRICE =60 EURO, PREMIUM RS 0.05/EURO AND SPOT PRICE ON MATURITY RS 60.20/EURO ‡ EXERCISES OPTION AND PAYS
± 60*62500+3125=3753125 ± WITHOUT OPTION PAYS ± 62500*60.20=3762500
14

HEDGING
‡ ‡ ‡ ‡

Name of Institution

PURCHASING OF OPTIONS EXPORTER EXPORTS GOODS WORTH 62500 EURO PAYMENT AFTER 2 MONTHS EURO MIGHT DEPRECIATE HENCE BUYS A PUT OPTION ‡ STRIKE PRICE RS 60/EURO, PREMIUM 0.05 AND SPOT RATE RS59.80/EURO ‡ EXERCISES OPTION AND RECEIVES 60*625003125=3746875 ‡ WITHOUT OPTION WOULD HAVE GOT 59.80 * 62500=3737500
15

HEDGING

Name of Institution

‡ SELLING OF OPTIONS-ADVISABLE WHEN VOLATILITY IS MARGINAL ‡ IMPORTER SELLS A PUT OPTION AND EXPORTER SELLS A CALL OPTION ‡ IMPORTER IMPORTS FOR EURO 62500 AND FEARS IT WILL APPRECIATE AND SELLS A PUT OPTION AT A PRICE OF RS 60 /EURO AND PREMIUM OF RS 0.15/EURO. IF PRICE GOES UP TO RS 60.05 THEN
± BUYER WILL NOT EXERCISE AND IMPORTER WILL RECEIVE RS 9375.

‡ IF PRICE FALLS TO RS 59.95 THE BUYER WILL EXERCISE OPTION. IMPORTER PAYS THE BUYER RS 3750000-9375=3740625.WITHOUT HEDGING IMPORTER PAYS 3746875
16

HEDGING

Name of Institution

‡ EXPORTER SELLS A CALL OPTION ‡ EXPORTER EXPORTS FOR EURO 62500 AND FEARS EURO WILL DEPRECIATE. SELLS A CALL OPTION AT A PRICE OF RS 60/- AND PREMIUM OF RS 0.15. ‡ IF THE RATE ON MATURITY FALLS TO RS 59.95 THE BUYER OF CALL OPTION WILL NOT EXERCISE AND EXPORTER WILL GET RS 9375 ‡ EXPORTER RECEIVES 62500*59.95+9375=3756250 ‡ IN CASE OF NO SALE OF CALL OPTION EXPORTER GETS 3746875

17

Currency futures

Name of Institution

‡ A commitment to buy/sell a specified amount of currency on future date at pre determined price existing on the date of contract. ± In standard lots ± Limited currencies ± In USD per other currencies ± Chicago-GBP-62500,CAND &AUSD 100000,EURO /SWF 125000,JPY12500000 ± Fluctuations differ according to currencies

Name of Institution

± Standardised maturities-Jan,March, April,June, July, Sept, Oct, Dec ± Date of Delivery third Wednesday of the above months. ± Guarantee deposit required. ± Futures rates are very close to forward rates for the same maturities ‡ Otherwise one can buy a currency in forward if it was cheaper and sell in futures without any risk assuming there are no transactions cost. ± Principle of covering a risk in future ‡ Compensate a loss of opportunity on the spot market by a gain of almost the same on futures market ‡ Purchase of a currency protects against an appreciation of the currency. ‡ Sale of a currency protects against depreciation of a currency.

19

Currency futures

Name of Institution

‡ Futures contracts are done in a Trading roof called PITS unlike OTC in case of Forward through brokers who charge commission from their clients ‡ When a broker trades for himself he is called a local/floor trader/Scalpers( position L/S not > few minutes ‡ Day traders ‡ Position traders ‡ Floor brokers ‡ When he trades for both he is called a Dual trader and normally indulges in ³ Front Running´ ‡ No Bid/ask rates. Commission serves as a spread. ‡ Clearing House is involved.

Name of Institution

‡ Buyer/seller of futures can close out their positions before settlement dates by selling/purchasing an identical futures contract ‡ Margin in cash/liquid securities is to be maintained with the CH as a trader represents a risk as long as they may not be in a position to buy the underlying foreign currency. ‡ Margin consists of initial deposit and maintenance margin. If the latter falls below a minimum level then additional amount known as variation margin is deposited.
21

Currency futures

Name of Institution

‡ Variation margin depends on the probability of exhaustion which is ± P=2(1-N(w)) and w=D/(V*K*¥ T) ± D=cash deposit for each futures contract ± V=standard deviation of daily change in price of futures contract ± K=Value of 1 futures contract ± T= number of trading days over which calculation is based. ± N=Cumulative distribution function for a standard normal variant.

Name of Institution

‡ Marking to market ± Gains/loss settled everyday by matching movement of spot rates. ± Less risky as daily settlement takes place. ‡ Costs ± Commission on brokerage ± Floor trading and clearing fee ± Delivery cost. ‡ Hedging ± Delta ±maturity mismatch ± Cross-Size mismatch ± Delta ±cross-Both mismatch

23

Name of Institution

‡ Suppose a forex mgr goes for GBP futures contract in US futures mkt at an assumed spot rate of USD /GBP . ‡ SD of daily change in price of futures contract is 0.0040 ‡ Exhaustion occurs not more than 10% of the time. ‡ T=9 days ‡ W=D/.0040*62500*¥9=D/750 ‡ P=1-0.90=0.10 ‡ W must be determined 0.10=2{1-N(w)} ‡ N(w)=0.95 ‡ From norm dist table w=1.90 ‡ Hence D/750=1.90 D=1425
24

Name of Institution

‡ ‡ ‡ ‡ ‡

CAND FUTURE OF 100000 AT USD 0.7500 MATURITY -2 DAYS USD 0.7550/0.7490 INVESTOR PROFIT-100000*(0.755-0.750) DIFF
± SIZE,MATURITY,METHOD OF TXN,COMM,CH,ACESS,REGULATION,LIQIDATI ON ± COMM-BROKERAGE/FLOOR &CH TRADING FEE/DELIVERY COST

Forward vs futures
charactersistics size maturity Method of txn commission Sec dep Clearing opr access regulation liquidation forward Tailored to need Tailored to need otc Spread ±buy/sell NA NA Large customer Self regulating Mostly by actual delivery futures

Name of Institution

standardized standardized Exchange floor Brokerage fee Margin money with claering house Clh house daily settlement anyone Rules of SE Offsetting contract
26

Types of order

Name of Institution

‡ Limit order²particular price ‡ Fill or kill-fill an oreder immediately at a specific price ‡ All or none-different parts of deal at different price ‡ On the open order-within few minutes of opening of SE ‡ On the close-txn during the closure of SE ‡ Stop order reversing trade when price a presecribed limit
27

Name of Institution

‡ IMORTERS PURCHASE FUTURES
± Short on FC ± To hedge against appreciating FC he
‡ Goes long on the futures

‡ EXPORTERS SELL FUTURES
± Long on FC ± To hedge against depreciating FC
‡ Goes short on futures

Hedging ±currency futurs

Name of Institution

‡ Take position in future market opposite to that in the physical market ‡ Strive to nullify gain/loss in physical mkt by loss/gain in futures mkt so as to achieve target price with as much as certainty as possible ‡ Ultimate price realized in hedge through futures is dependent upon the prices of futures at the time of cancelling the contracts and ultimate price prevailing in spot mkt

29

Hedging -importers

Name of Institution

‡ Long hedge when one has to purchase a certain asset in future and needs to lock in the price ‡ In June 2010 an importer buys a machine at USD 51000/‡ Payment is due after 6 months ‡ The spot exchange rate is RS 45.5650 ‡ December futures is trading at RS 46.6525 ‡ The importer feels the USD will appreciate much more ‡ Future contracts are available for RS 25 lacs ‡ What should the importer do?
30

Name of Institution

‡ Situation 1-When USD appreciates to RS 47.5625 and futures sells for RS 47.5725 ‡ The importer exists the futures contract at RS 47.5725 and buys the foreign currency in the spot mkt at prevailing spot rate ‡ Importer buys USD 51000 @RS 47.5625=2425687.50 x ‡ Sells the futures contract booked earlier ‡ A. No of USD bought 2500000/RS 46.6525=53587.69 ‡ B. No of USD sold 2500000/RS 47.5725=52551.36 ‡ Net gain on futures A-B=1036.32 ‡ Equivalent Rupees=1036.32*47.5625=49290.31 y ‡ Net Rupees paid x-y=2376397.19 EER=46.5960

31

Name of Institution

‡ Situation ( 2 )USD depreciates to RS 44.5650 and futures sells for RS 44.5725 ‡ Importer buys USD 51000:Cost 51000*44*5650=2272815 ----x ‡ Sells the futures contract booked earlier ‡ A No of USD bought 2500000/46.6525=53587.69 ‡ B No of usd sold =2500000/44.5725=56088.39 ‡ Net loss on futures (B-A)=2500.69 ‡ Equivalent RS =2500.69*44.5650=111443----y ‡ Net rupees paid=x+y=2384258 ‡ EER=46.7501
32

Sponsor Documents

Or use your account on DocShare.tips

Hide

Forgot your password?

Or register your new account on DocShare.tips

Hide

Lost your password? Please enter your email address. You will receive a link to create a new password.

Back to log-in

Close