copyright © 2006 pearson addison-wesley. all rights reserved.7-1 loss profit (us cents/sf) + 1.00 +...
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Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 7-1
Loss
Profit (US cents/SF)
+ 1.00
+ 0.50
0
- 0.50
- 1.00
57.5 58.0 59.0 59.558.5
Limited loss
Unlimited profit
Break-even price
Strike price
“Out of the money” “In the money”
“At the money”
Spot price(US cents/SF)
The buyer of a call option on SF, with a strike price of 58.5 cents/SF, has a limited loss of 0.50 cents/SF at spot rates less than 58.5 (“out of the money”), and an unlimited profit potential at spot rates above 58.5 cents/SF (“in the money”).
Profit & Loss for the Buyer of a Call Option
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 7-2
Loss
Profit (US cents/SF)
+ 1.00
+ 0.50
0
- 0.50
- 1.00
57.5 58.0 59.0 59.558.5
Limited profit
Unlimited loss
Break-even price
Strike price
“At the money”
Spot price(US cents/SF)
The writer of a call option on SF, with a strike price of 58.5 cents/SF, has a limited profit of 0.50 cents/SF at spot rates less than 58.5, and an unlimited loss potential at spot rates above (to the right of) 59.0 cents/SF.
Profit & Loss for the Writer of a Call Option
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 7-3
Loss
Profit (US cents/SF)
+ 1.00
+ 0.50
0
- 0.50
- 1.00
57.5 58.0 59.0 59.558.5
Limited loss
Profit upto 58.0
Strike price
“In the money” “Out of the money”
“At the money”
Spot price(US cents/SF)
The buyer of a put option on SF, with a strike price of 58.5 cents/SF, has a limited loss of0.50 cents/SF at spot rates greater than 58.5 (“out of the money”), and an unlimited profit potential at spot rates less than 58.5 cents/SF (“in the money”) up to 58.0 cents.
Break-evenprice
Profit & Loss for the Buyer of a Put Option
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 7-4
Loss
Profit (US cents/SF)
+ 1.00
+ 0.50
0
- 0.50
- 1.00
57.5 58.0 59.0 59.558.5
Unlimited lossup to 58.0
Limited profit
Strike price
Spot price(US cents/SF)
The writer of a put option on SF, with a strike price of 58.5 cents/SF, has a limited profit of0.50 cents/SF at spot rates greater than 58.5, and an uanlimited loss potential at spot rates less than 58.5 cents/SF up to 58.0 cents.
Break-evenprice
“At the money”
Profit & Loss for the Writer of a Put Option
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 7-5
1.69 1.70 1.71 1.72 1.731.681.671.660.0
1.0
2.0
3.0
4.0
5.0
Spot rate ($/£)
Option Premium(US cents/£)
6.0
1.74
4.00
Intrinsic value
3.30
5.67
1.67
Total value
Time value
-- Valuation on first day of 90-day maturity --
Strike Price of $1.70/£
Option Pricing and Valuation
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 7-6
Exhibit 7.1 Mexican Peso Futures, US$/Peso (CME)
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 7-7
Exhibit 7.2 Currency Futures and Forwards Compared
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 7-8
Exhibit 7.3 Swiss Franc Option Quotations (U.S. Cents/SF)
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 7-9
Exhibit 7.4 Buying a Call Option on Swiss Francs
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 7-10
Exhibit 7.5 Selling a Call Option on Swiss Francs
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 7-11
Exhibit 7.6 Buying a Put Option on Swiss Francs
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 7-12
Exhibit 7.7 Selling a Put Option on Swiss Francs
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 7-13
Exhibit 7.9 The Intrinsic, Time, and Total Value Components of the 90-Day Call Option on British Pounds at Varying Spot Exchange Rates
Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 7-14
Exhibit 7.10 Foreign Exchange Implied Volatility, January 31, 2002