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Formula - Chapter 07 Futures Options

The document provides formulas and explanations for currency futures and options including the status of buying options, profit and loss calculations for option and futures positions, break-even points, and option pricing and valuation. Key terms like intrinsic value and time value are defined.

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16 views

Formula - Chapter 07 Futures Options

The document provides formulas and explanations for currency futures and options including the status of buying options, profit and loss calculations for option and futures positions, break-even points, and option pricing and valuation. Key terms like intrinsic value and time value are defined.

Uploaded by

siddev12344321
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Instructor: Amy Ho

Formulas for Chapter 7 Currency Futures and Options

· Status of buying options

Option Strike Price Relative to Spot Rate


Description Call Option Put Option Effect of Exercise
In the
Strike Price < Spot Rate Strike Price > Spot Rate Profit
money
At the
Strike Price = Spot Rate Strike Price = Spot Rate Indifference
money
Out of the
Strike Price > Spot Rate Strike Price < Spot Rate Loss
money

· Profit (Loss) on option and futures positions

(1) Option

Buying Call Option:


In the money: Contract Amount × [(Spot Rate - Strike Price) – Premium]
Out of the money: - [Contract Amount × Premium]

Buying Put Option:


In the money: Contract Amount × [(Strike Price - Spot Rate) – Premium]
Out of the money: - [Contract Amount × Premium]

(2) Futures

Buying Futures: Contract Amount × (Spot Rate - Future Rate)

Selling Futures: Contract Amount × (Future Rate - Spot Rate)

· Break-even point

(1) Option

Call Option: Spot Rate – Strike Price – Premium = 0

Put Option: Strike Price – Spot Rate – Premium = 0

(2) Futures

Spot Rate – Futures Rate = 0

· Option pricing (Value at expiration)

(1) Buying Call = Max[S - X, 0]


(2) Buying Put = Max[X - S, 0]

where S = Spot rate, X = Strike price

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Instructor: Amy Ho

· Option Valuation

Option Value = Intrinsic Value + Time Value

where
Intrinsic Value (call) = Spot Rate (S) – Strike Price (X)
Intrinsic Value (put) = Strike Price (X) – Spot Rate (S)

Thus,
Time Value = Option Value – Intrinsic Value

· Summary

Long (Buy) Call Option Long (Buy) Put Option


Profit
(Loss)
Chart

Profit Profit = (S – X) – Premium if S > X Profit = (X – S) – Premium if S < X


Loss Loss = - Premium if S ≤ X Loss = - Premium if S ≥ X
Max Profit Max Profit = ∞ Max Profit = X - Premium
Max Loss Max Loss = Premium Max Loss = Premium
Inflow Inflow = S (from spot sales) Inflow = X
Outflow Outflow = Premium + X Outflow = Premium + S (from spot
purchases)
Break- S = X + Premium S = X - Premium
even
Value at Max [S – X, 0] Max [X – S, 0]
Expiration

Short (Sell) Call Option Short (Sell) Put Option


Profit
(Loss)
Chart

Profit Profit = Premium if S ≤ X Profit = Premium if S ≥ X


Loss Loss = (X – S) + Premium if S > X Loss = (S – X) + Premium if S < X
Max Profit Max Profit = Premium Max Profit = Premium
Max Loss Max Loss = ∞ Max Loss = X - Premium
Inflow Inflow = Premium + X Inflow = Premium + S (from spot sales)
Outflow Outflow = S (from spot purchases) Outflow = X
Break- S = X + Premium S = X - Premium
even
Value at Max [X – S, 0] Max [S – X, 0]
Expiration

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