CURRENCY OPTION

CURRENCY OPTION PROVIDE THE RIGHT BUT

NOT THE OBLIGATION TO BUY OR SELL A
SPECIFIC CURRENCY AT A SPEICIFIC PRICE AT
ANY TIME PRIOR TO A SPECIFIED DATE
 BENEFIT OF OPTIONS
THE USER OF OPTION OBTAINS AN
INSURANCE AGAINST THE ADVERSE
MOVEMENT IN EXCHANGE RATE BUT
RETAINS THE OPPORTUNITY TO
BENEFIT FROM A FAVOURABLE
MOVEMENT IN EXCHANGE RATE
 TYPES OF OPTIONS
∆ AMERICAN OPTION :- AN OPTION
WHICH CAN BE EXERCISED ON ANY
BUSINESS DAY WITHIN THE OPTION
PERIOD IS CALLED AMERICAN OPTION
∆ EUROPEAN OPTION :- AN OPTION
WHICH CAN BE EXERCISED ONLY ON
THE EXPIRY DATE IS CALLED
EUROPEAN OPTION
 CALL OPTION
A CALL OPTION IS AN OPTION TO
PURCHASE A STATED NUMBER OF
UNITS OF UNDERLYING FOREIGN
CURRENCY AT A SPECIFIED PRICE PER
UNIT DURING A SPECIFIED PERIOD OF
TIME
 PUT OPTION
PUT OPTION GIVES THE RIGHT TO SELL
THE UNDERLYING FOREIGN
CURRENCY AT THE SPECIFIED PRICE
PER UNIT DURING A SPECIFIED PERIOD
OF TIME.
 OPTION BUYER
THE PARTY WHO OBTAINS THE RIGHT
BY PAYING A PREMIUM IS CALLED THE
OPTION BUYER.
 OPTION SELLER

THE PARTY WHO OWNS OBLIGATION TO

PERFORM IF THE OPTION IS EXERCISED
IS CALLED OPTION SELLER.
EXERCISE PRICE/STIKE PRICE
THE PRICE AT WHICH THE OPTION
HOLDER HAS THE RIGHT TO PURCHASE
OR SELL THE UNDERLYING CURRENCY
IS CALLED EXERCISE PRICE
 EXPIRATION MONTH
THE EXPIRATION MONTHS FOR OPTION
ARE: MARCH, JUNE, SEPTEMBER AND
DECEMBER
 EXPIRATION DATE
THE LAST DATE ON WHICH AB OPTION
MAY BE EXERCISED
 INTRINSIC VALUE OF OPTION
INTRINSIC VALUE OF OPTION IS THE
EXTENT TO WHICH AN OPTION IS
PROFITABLE TO EXERCISE.
 NOTICE OF EXERCISE
• NOTICE OF EXERCISE IS REQUIRED TO
BE GIVEB BY AN OPTION HOLDER TO
AN OPTION WRITER THAT THE OPTION
IS BEING EXERCISED.
 OPTION AT THE MONEY

EXERCISE PRICE = SPOT PRICE

OPTION OUT OF MONEY
EXERCISE PRICE > SPOT RATE
 OPTION IN THE MONEY
EXERCISE PRICE < SPOT RATE