Options on foreign exchange
It is well known that foreign exchange is the world's largest financial market. What is less well known is that the market for currency options and other derivatives on foreign exchange is also massive and still growing. This book has been written for end users of currency options and newcomers to the field of foreign exchange. It employs the real-world terminology of the foreign exchange market whenever possible so that readers can make a smooth transition from the text to actual market practice. The opening chapters present a substantive discussion of the spot and forward foreign exchange market and the mechanics of trading currency options. Next, attention turns to the pervasive Black-Scholes-Merton option pricing model as applied to currency options. An examination of currency futures options follows. The final chapters are devoted to exotic currency options, with special attention given to a variety of barrier currency options. Average rate, compound, basket, and quantos currency options are also covered. Options on Foreign Exchange, Second Edition is written for traders, corporate treasurers, risk managers, and students of financial markets.
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Foreign Exchange Basics
Trading Currency Options
Payoff Patterns at Expiration
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American options arbitrage backspread Bodurtha and Courtadon BSGK model call option calls and puts cents compound option cross-currency option currency call currency futures contracts Currency Futures Options currency interest rate Days to Expiration delta diffusion process domestic interest rate early exercise premium equal European call European currency European option example Exhibit expiration day foreign exchange foreign interest rates forward contract forward exchange rate futures call futures contract futures price futures put gamma German mark implied volatility in-the-money Japanese yen jump June knock-out Listed Currency long position lookback margin Margrabe Maximum Loss Maximum Profit option model options on actual out-of-the-money Parameters Parity Theorem partial derivatives payoff percent PHLX portfolio present value put option Put-Call Parity puts and calls quoted rency riskless settlement short call short position short put spot exchange rate spot rate spread straddle strike price tion trading U.S. dollar unit of foreign USDX variance zero coupon bond