Differences Between Currency Futures And Options
Check your essay before you submit. See exactly what your professor sees.
See your AI and plagiarism results before your instructor does.Get the exact same report your professor uses. Trusted by 50,000+ students worldwide.
1. Describe the key differences between currency futures and options. (8 points)
A currency option is the right to purchase or sell a currency at a certain price and by a predetermined date. A currency futures option is the right to purchase or sell a currency futures position at any moment for certain duration of time. The key difference between options and futures, according to their definitions, is that futures contracts necessitate that the transaction described by the contract take place on the stated date, while options offer the contract buyer the right — but not the responsibility — to perform the transaction. Furthermore, unlike futures contracts, options may be executed at any moment before their expiry, while futures contracts only enable transaction of the underlying commodity on the contract’s designated date.
2. Dec. 2021 Canadian dollar futures are now trading at $0.7850. If you buy one Canadian dollar futures contract (size = C$100,000) at this price and sold it at expiration when its price settles at $0.7920, what is your profit/loss from this transaction? (8 points)
Calculation of total profit or loss:
= (Sell Price – Buy Price)*(Size of Contract)
= ($0.7920-$0.7850)*(100000)
= $700
Therefore, profit from the transaction is $700
3.(a) Define currency options contract. What are put and call options?
A currency option is a contract that offers buyers the right, but not the duty, to sell or buy a currency at a certain exchange rate within a certain time period. Investors might use them to protect themselves from negative exchange rate changes. A put option allows investors to sell currency at a certain price on a given date, but it does not obligate them to do so. This currency choice is best used when investors anticipate the currency’s value, such as the US dollar, to rise against some other currency. A call option, on the other hand, gives investors the right to purchase currency at a certain price. When investors predict the value of the US dollar to fall against another currency, such as the Japanese yen, this currency choice becomes a success.
(b) You bought a Dec. 21 put option on euro with a strike price (K) of $1.1850/Є in June 21 and paid a premium of $0.015/£. The current spot exchange (S) rate for euro is $1.1750/£. Contract size = Є125,000
(i) What are the intrinsic and the time values of this option?
Intrinsic value = MAX(S – K,0)
= (1.1750 – 1.1850,0)
= $ 0.000
Time value = option premium – intrinsic value
= 0.015 – 0
= $ 0.015
(ii) (a) What is the profit/loss if the option is exercised at expiration if the spot rate settles at $1.1650/£? (b) if the spot rate settles at $1.1950? The U.S. interest rate is 2%. (20 points)
Profit or -loss = (MAX(S – K,0) – premium) x size
Profit or -loss at 1.1650 = [(1.1650-1.1850,0) – 0.015] x 125000
= -$ 4375.00
Profit or -loss at 1.1950 = [(1.1950-1.1850,0) – 0.015] x 125000
= -$ 625.00
4.You own one Nov. 21 call options on Canadian dollar with K = $0.7650 for which you paid a premium of $0.005/C$. The spot exchange rate today is $0.7700.
(i) How would you classify this option today, in-the-money or out-of-the-money?
I would classify the option as out-of-the-money.
(ii) What is your profit/loss if you sell this option today when it is trading at a premium of $0.015/C$? Contract size is C$100,000 and the U.S. interest rate is 2%. Assume that you bought this option in Sept 21. (12 points)
Profit= Size of Contract (Price now-Purchase Price-Purchase Price*r*t)
=100000 (0.015 – 0.005 – 0.005*2%*1/12)
=999.1667
5.(a) What is the payoff profile of a buyer and a writer of an option?
Call Option- Buy
It is possible to acquire an underlying asset at a specific strike price by purchasing a call option. The amount of profit or loss a buyer makes on an option is determined by the spot price of the underlying assets. If the current price exceeds the strike price at expiry, buyers will profit. With a high spot price comes a large profit. If the underlying asset’s spot price is less than the strike price, buyers let their options expire with no exercise. As a result, the buyer loses the premium they paid for the option.
Call option – Sell
It offers the buyer the opportunity to purchase the underlying asset at the strike prices established in the option agreement. The writer/seller of the option receives a premium for the sale of an option. Whether the buyer wins money or loses money on the option relies on the current spot price of the underlying asset. If the spot price exceeds the strike price when the option expires, the buyer will exercise their option to acquire the stock from the writer. The option writer will lose money if the spot price rises. If the underlying’s spot price is less than the strike price on the expiration date, the buyer lets the writer get the payout.
Put Option-Long Put
In this case, the buyer has the opportunity to sell the underlying asset at the strike price indicated in the option agreement, if they choose to do so. The buyer’s profit or loss on the option is tied to the spot price of the underlying, just as with a call option. The buyer makes money if the spot price is lower than the strike price on the expiration date. More profit is made by the buyer when the current price falls. If the underlying’s spot price exceeds the strike price, the buyer’s option expires without being exercised. The premium paid to acquire the option results in a loss for the buyer.
A put option
Buyer will execute option on writer at expiry if spot prices are lower than strike prices. Option holders who let their options expire for more than the strike price are entitled to a premium, which goes to the writer.
(b) What are the drivers of option’s premium? (10 points)
Buyers of option contracts pay premiums to sellers in the form of option premiums. The premium on alternatives is always shifting. Value of the underlying asset, risk level, and time left in the contract all impact option premium. In the event that you’re IN THE MONEY, you’ll be charged a higher premium. There will be a lesser premium for OUT OF THE MONEY.
Differences Between Currency Futures And Options ESSAY
DO MY HOMEWORK NOW!Write my Essay. Premium essay writing services is the ideal place for homework help or essay writing service. if you are looking for affordable, high quality & non-plagiarized papers, click on the button below to place your order. Provide us with the instructions and one of our writers will deliver a unique, no plagiarism, and professional paper.
Get help with your toughest assignments and get them solved by a Reliable Custom Papers Writing Company. Save time, money and get quality papers. Buying an excellent plagiarism-free paper is a piece of cake!
All our papers are written from scratch. We can cover any assignment/essay in your field of study.
