1. 6. Currency options International Financial Services 2 Karel Bruna

2. Main Characteristics of Currency Options Markets: OTC contract/exchange traded contract Maturity: 1M, 2M, 3M, 6M, 9M, 12M + odd dates/fixed dates Price: bid/ask option premium Currency pairs: main currency pairs Amount: minimum defined by the market maker/exchange Interest Rates: interbank deposit/lending rates yields of treasury instruments

3. Currency options USD/EUR call option profit/loss function, SP = 1,20 USD/EUR, Pr = 0,1 USD/EUR profit call option holder 0,1 1,20 1,40 future spot rate -0,1 1,30 call option writer loss

4. Currency options option premium option premium = intrinsic value + time value

5. Currency options Garman and Kohlhagen pricing formula for European call (c) and put (p) options where: SR - actual spot exchange rate SP - strike (exercise) price IR D and IR F - domestic and foreign risk free interest rate t - time (in years) until the expiration of the option σ - volatility of spot exchange rate Φ - standard normal cumulative distribution function

6. Range forward put option holder asset 1,50 net position 24,50 26 27,70 29,20 0 - 0,20 26,20 SR t+n (CZK/EUR) - 1,50 call option writer