Foreign exchange option

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In finance, the option of foreign exchange (usually shortened to only FX option or currency option ) is a derivative financial instrument which grants the right but not the obligation to exchange money in a single currency to another currency at an agreed exchange rate on a certain date. See Foreign exchange Derivatives.

The foreign exchange option market is the deepest, largest and most liquid market for any options. Most trades are over the counter (OTC) and are lightly regulated, but some are traded on the exchange such as the International Stock Exchange, the Philadelphia Stock Exchange, or the Chicago Mercantile Exchange for futures contract options. The global market for exchange-traded currency options is notoriously rated by the Bank for International Settlements at $ 158.3 trillion in 2005.

Video Foreign exchange option

Contoh

For example, a GBPUSD contract can give the owner the right to sell Ã, Â £ 1,000,000 and buy $ 2,000,000 by December 31st. In this case the previously agreed exchange rate, or strike price, is 2,000 USD per GBP (or GBP/USD 2.00 as usually quoted) and the notional amount is Ã, Â £ 1,000,000 and $ 2,000. 000.

This type of contract is a call for dollars and sterling, and is usually called GBPUSD included , as this is an exchange rate ; although it could be called a USDGBP call.

If the exchange rate is lower than 2.0000 on December 31 (say 1.9000), which means that the dollar is stronger and the pound is weaker, then the option is done, allowing the owner to sell GBP at 2.0000 and immediately buy it back in the spot market at 1.9000, generating profit (2.0000 GBPUSD - 1.9000Ã, GBPUSD) ÃÆ'â € Å" 1,000,000 GBP = 100,000 USD in the process. If instead they take advantage of the GBP (by selling USD on the spot market), this amount becomes 100,000 Ã,9,9000 = 52.632Ã, GBP.

Maps Foreign exchange option

Requirements

• Call options - rights to buy assets with fixed dates and prices.
• The put option - the right to sell the asset at a fixed date and price.
• Foreign currency options - the right to sell money in one currency and buy money in another currency with fixed dates and values.
• The strike price - the asset price at which the investor can use the option.
• Spot price - asset price at the time of trading.
• Sending price - asset price for future delivery.
• Notional - the amount of each currency that allows the option to be sold or bought by an investor.
• Notional ratios - strikes, not current places or advanced .
• NumÃÆ' Â © raire - the currency in which the asset is valued.
• Nonlinear results - the rewards for the direct FX option are linear in the underlying currency, denominations of payments in certain numÃÆ' Â © raire.
• Change numÃÆ' Â © raire - implied volatility of the FX option depends on the number of buyers, again due to non-linearity ${\ displaystyle x \ mapsto 1/x}$ .
• In money - for the put option, this is when the current price is less than the strike price, and thus will result in profits made; for call options, the situation is reversed.

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Trading

The difference between the FX option and the traditional option is that in the latter case, the trade is to give some money and receive the right to buy or sell commodities, stocks or other non-pecuniary assets. In the FX option, the asset is also money, in the other currency.

For example, the call option on oil allows investors to buy oil at a certain price and date. Investors on the other hand trading basically sell the put option on the currency.

To remove residual risk, adjust the foreign currency notional , not the local currency notional, if the foreign currency received and sent is not offset.

In the case of the FX option at the level, as in the example above, the option on GBPUSD gives a linear USD value in GBPUSD using USD as numÃÆ' Â © raire (transfers from 2,000 to 1.9000 yields.10 * $ 2,000,000/$ 2.0000 = $ 100,000 profit), but has a non-linear GBP value. Conversely, the GBP value is linear in USDGBP exchange rate, while USD value is non-linear. This is because reversing the value has the effect of ${\ displaystyle x \ mapsto 1/x}$ , which is not linear.

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Hedging

Corporations primarily use the FX option to protect future uncertainty future cash flows in foreign currencies. The general rule is to protect certain foreign exchange cash flows with forwards , and uncertain of foreign cash flows with options .

Suppose a UK manufacturing company hopes to be paid US $ 100,000 for a piece of engineering equipment that will be shipped in 90 days. If GBP strengthens against US $ over the next 90 days, the UK company loses money, because it will receive less GBP after converting US $ 100,000 to GBP. However, if the GBP weakens against US $, then the UK company receives more GBP. This uncertainty exposes the company to FX risk. Assuming that certain cash flows, the company can enter into a forward contract to give US $ 100,000 within 90 days, instead of GBP at the current advanced level. This forward contract is free, and, assuming that the expected cash arrives, exactly as the company's exposure, perfectly protects their FX risks.

If cash flows are uncertain, forward exchange contracts expose the company to risk of FX in the opposite direction, in the case that the expected USD cash is not received, usually making better choices.

Using the option, UK companies can buy the put GBP/USD put option (the right to sell part or all of their expected earnings for pound sterling at a predetermined rate), which:

• protects the expected GBP value within 90 days (assuming cash is received)
• the most cost premium option (unlike forward, which can incur unlimited losses)
• makes a profit if the expected cash is not received but the FX price moves in its favor

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Rating: Garman-Kohlhagen model

As with the Black-Scholes model for stock options and Black models for certain interest rate options, the value of the European option at the FX level is usually calculated assuming that the tariff follows the log-normal process.

Pada tahun 1983 Garman dan Kohlhagen memperluas model Black-Scholes untuk mengatasi kehadiran dua suku bunga (satu untuk setiap mata uang). Misalkan ${\ displaystyle r_ {d}}  ÂÂ$ adalah suku bunga bebas risiko untuk berakhirnya mata uang domestik dan ${\ displaystyle r_ {f}}  ÂÂ$ adalah suku bunga bebas risiko mata uang asing (di mana mata uang domestik adalah mata uang di mana kita mendapatkan nilai opsi; rumus juga mengharuskan kurs FX - baik strike dan spot saat ini dikutip dalam "unit mata uang domestik per unit mata uang asing"). Hasilnya juga dalam satuan yang sama dan menjadi bermakna perlu diubah menjadi salah satu mata uang.

Kemudian nilai mata uang domestik dari opsi panggilan ke dalam mata uang asing adalah

${\ displaystyle c = S_ {0} e ^ {- r_ {f} T} {\ mathcal {N}} (d_ 1) - Ke ^ {- r_ {D} T} {\ mathcal {N}} (d_2)} Â Â$

Nilai put option to remember nilai

${\ displaystyle p = Ke ^ {- r_ {d} T} {\ mathcal {N}} (- d_2) - S_ 0 e ^ {- r_ {f} T} {\ mathcal {N}} (- d_ 1)} Â Â$

Various techniques are used to calculate the risk exposure of choice, or the Greeks (like the Vanna-Volga method). Although the option price generated by each model agrees (with Garman-Kohlhagen), the number of risks may vary significantly depending on the assumptions used for the property of spot price movements, surface volatility curves and interest rates.

After Garman-Kohlhagen, the most common model is SABR and local volatility, although when approving the number of risks with partners (eg for delta exchanges, or counting strikes on 25 delta options) Garman-Kohlhagen is always used.

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References

Source of the article : Wikipedia