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A Currency Options Primer

توضیحات

In recent years, currencies of major industrial nations have fluctuated widely in response to trade imbalances, interest rates, commodity prices, and political uncertainty. The pressure to maintain currency parity has led to the breakdown of many exchange rate mechanisms, and has forced the need for active foreign exchange hedging decisions to prevent the erosion of profit margins.

To counteract this worldwide market volatility, currency options were developed as an alternative risk management tool to the spot and forward foreign exchange market, and owe their existence to the demands of foreign exchange users for alternative hedging and exposure management techniques.

This essentially practical book gives a thorough and comprehensive guide to currency options, with clear explanations of the technicalities. It should become recommended reading for many business courses, and will be of interest to new recruits and junior members in investment and merchant banks; to Forex specialist firms; to Treasury institutions; and to investors who require a quick guide within a trading and sales environment.


SHANI SHAMAH has spent over twenty years in the financial market. Her previous book, A Foreign Exchange Primer, is proving to be a great success.
Disclaimer.

1 Introduction.

1.1 The forward foreign exchange market.

1.2 The currency options market.

1.3 The alternatives to currency options.

1.4 The users.

1.5 Whose domain?

PART I: MARKET OVERVIEW.

2 The Foreign Exchange Market.

2.1 Twenty-four-hour global market.

2.2 Value terms.

2.3 Coffee houses.

2.4 Spot and forward market.

2.5 Alternative markets.

2.6 Currency options.

2.7 Concluding remarks.

3 A Brief History of the Market.

3.1 The barter system.

3.2 The introduction of coinage.

3.3 The expanding British Empire.

3.4 The gold standard.

3.5 The Bretton Woods system.

3.6 The International Monetary Fund and the World Bank.

3.7 The dollar rules OK.

3.8 Special drawing rights.

3.9 A dollar problem.

3.10 The Smithsonian agreement.

3.11 The snake.

3.12 The dirty float.

3.13 The European Monetary System.

3.14 The Exchange Rate Mechanism.

3.15 The European Currency Unit.

3.16 The Maastricht Treaty.

3.17 The Treaty of Rome.

3.18 Economic reform.

3.19 A common monetary policy.

1.20 A single currency.

3.21 Currency options.

3.22 Concluding remarks.

4 Market Overview.

4.1 Global market.

4.2 No physical trading floor.

4.3 A “perfect” market.

4.4 The main instruments.

4.5 Comparisons of options with spot and forwards.

4.6 The dollar’s role.

4.7 Widely traded currency pairs.

4.8 Concluding remarks.

5 Major Participants.

5.1 Governments.

5.2 Banks.

5.3 Brokering houses.

5.4 International Monetary Market.

5.5 Money managers.

5.6 Corporations.

5.7 Retail clients.

5.8 Others.

5.9 Speculators.

5.10 Trade and financial flows.

6 Roles Played.

6.1 Market makers.

6.2 Price takers.

6.3 A number of roles.

6.4 A number of roles – options.

6.5 Concluding remarks.

7 Purposes.

7.1 Commercial transactions.

7.2 Funding.

7.3 Hedging.

7.4 Portfolio investmen.6

7.5 Personal.

7.6 Market making.

7.7 Transaction exposure.

7.8 Translation exposure.

7.9 Economic exposure.

7.10 Concluding remarks.

8 Applications of Currency Options.

9 Users of Currency Options.

9.1 Variety of reasons.

9.1.1 Example 1.

9.1.2 Example 2.

9.1.3 Example 3.

9.2 Hedging vs speculation.

Glossary of foreign exchange terms.

PART II: CURRENCY OPTIONS – THE ESSENTIALS.

10 Definitions and Terminology.

10.1 Call option.

10.2 Put option.

10.3 Parties and the risks involved.

10.4 Currency option risk/reward perception.

10.5 Currency or dollar call or put option?

10.6 Strike price and strike selection.

10.7 Exercising options.

10.8 American and European style options.

10.9 In-, at- or out-of-the-money.

10.10 The premium.

10.11 Volatility.

10.12 Break-even.

11 The Currency Option Concept.

12 The Currency Options Market.

12.1 Exchange vs over-the-counter.

12.2 Standardised Options.

12.3 Customised options.

12.4 Features of the listed market.

12.5 Comparisons.

12.6 Where is the market?.

12.7 Concluding remarks.

13 Option Pricing Theories.

13.1 Basic properties.

13.2 Theoretical valuation.

13.3 Black-Scholes model.

13.4 Examples of other models.

13.5 Pricing without a computer model.

13.6 Educated guess.

13.7 The price of an option.

13.8 Option premium profile.

13.9 Time value and intrinsic value.

13.10 Time to expiry.

13.11 Volatility.

13.12 Strike price and forward rates.

13.13 Interest rates.

13.14 American vs European.

13.15 Concluding remarks.

14 The Greeks.

14.1 Delta.

14.2 Gamma.

14.3 Theta.

14.4 Vega.

14.5 Rho.

14.6 Beta and omega.

15 Payoff and Profit/Loss Diagrams.

15.1 Payoff diagram.

15.2 Profit diagram.

15.3 The option writer.

15.4 Put option.

15.5 Put option writer.

15.6 Basic option positions.

15.7 Graph addition.

15.8 Profit/loss profiles for ten popular option strategies.

15.9 Concluding remarks.

16 Basic Properties of Options.

16.1 Option values.

16.2 Put/call parity concept.

16.3 Synthetic positions.

17 Risk Reversals.

17.1 Understanding risk reversals.

17.2 Implications for traders.

17.3 Implications for hedgers.

17.4 Concluding remarks.

18 Market Conventions.

18.1 Option price.

18.2 What rate to use?

18.3 Live price.

18.4 Pricing terms.

18.5 Premium conversions.

18.6 Settlement.

18.7 How is an option exercised?

18.8 Risks.

18.9 Concluding remarks.

Basic option glossary.

PART III: CURRENCY OPTION PRODUCTS.

19 Vanilla Options.

19.1 Long options.

19.2 Short options.

19.3 Straddle.

19.4 Strangle.

19.5 Cylinder.

19.6 Collar.

19.7 Participating forward.

19.8 Ratio forward.

19.9 Added extras to vanilla options.

20 Common Option Strategies.

20.1 Directional options.

20.2 Precision options.

20.3 Locked trade options.

21 Exotic Options.

21.1 Barriers.

21.2 Average rates.

21.3 Lookback and ladder.

21.4 Chooser.

21.5 Digital (binary).

21.6 Baskets.

21.7 Compound.

21.8 Variable notional.

21.9 Multi-factor.

22 Structured Currency Options.

22.1 Trigger forward.

22.2 Double trigger forward.

22.3 At maturity trigger forward.

22.4 Forward extra.

22.5 Weekly reset forward.

22.6 Range binary.

22.7 Contingent premium.

22.8 Wall.

22.9 Corridor.

23 Case Studies.

23.1 Hedging.

23.2 Trading.

23.3 Investment.

23.4 Bid to offer exposure.

23.5 Concluding remarks.

24 Option Hedge Matrix.

Exotic currency option glossary.

25 Concluding Remarks.

Index.