EXCHANGE TRADED CURRENCY OPTIONS

The Role of Exchange Traded Currency Options in Risk Management



Executive Summary

In this report we have analysed the effect of international risk management in a perspective of Stock market and financial instruments. The use of OTC currency options associated with certain difficulties. Derivatives have a larger amount of the contract compared to their stock counterparts. Another interesting possibility is due to the availability of any given option expiration date, opens with the regular use of similar strategies. Someone may wish to buy or sell a daily straddle or strangle one and the same life span. At the stock exchange is not possible. In the case of OTC instruments of implementation of such a concept does not work. In this study, such a strategy is not as absurd as it may seem at first glance.This analysis is superficial, we have to rely only on visual assessment of the correlation between the indicator and the lines that show the average premium straddle. In this report, the restrictive boundaries and shall be held in positive and negative fluctuations in the indicator areas of the zone, corresponding to positive and negative value of option combinations .This gives a very good idea about the distribution of gains/losses in the regular use of this strategy.

Contents

Section 1. Introduction1

Section 2.Literature Review2

Section 3. Applications4

Section 4. Details of Contracts5

Section 5. Complexity, the real and imaginary5

Section 6. OTC Features6

Section 7. Conclusion10

References11

The Role of Exchange Traded Currency Options in Risk Management

Section 1. Introduction

Exchange-traded currency options are easy to trade, primarily due to transparency. However, this aspect creates restrictions for investors seeking to expand the range of retail solutions with the use of option strategies. These OTC products are much more flexible tool than their stock counterpart, so the volume of the OTC market many times greater than the turnover, especially in the case of derivatives for currency. Figuratively speaking, so far from OTC options are building a pyramid of Cheops, the exchange continues to play in the sandbox.

The second feature is that the currency option is formally consists of two contracts. For example, Call a couple of Euro/Pound consists of two options: Call and Put on the euro to the pound. This is due to the fact that the execution of delivery option on a currency pair leads to an investment portfolio of both assets and liabilities.

Thus, the performance of the long Call on the Euro/pound results in the acquisition and sale of the euro the pound. If the latter is the first currency in the investment portfolio was missing, then there is an obligation on the pound, which in any case has to do. In other words, if the contract involves the delivery of the underlying asset, the option trader is almost automatically sail to the market FOREX. However, this aspect is more theoretical than practical importance, since such a feature of currency options does not affect the principles of valuation of these financial instruments.

Section 2.Literature Review

Another important point is related to the fact that these ...