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Profit & Loss for the Buyer of a Call Option

“At the money”. Strike price. “Out of the money”. “In the money”. Unlimited profit. Limited loss. Break-even price. Profit & Loss for the Buyer of a Call Option. Profit (US cents/SF). + 1.00. + 0.50. 0. Spot price (US cents/SF). 57.5. 58.0. 58.5. 59.0. 59.5. - 0.50. - 1.00.

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Profit & Loss for the Buyer of a Call Option

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  1. “At the money” Strike price “Out of the money” “In the money” Unlimited profit Limited loss Break-even price Profit & Loss for the Buyer of a Call Option Profit (US cents/SF) + 1.00 + 0.50 0 Spot price (US cents/SF) 57.5 58.0 58.5 59.0 59.5 - 0.50 - 1.00 Loss The buyer of a call option on SF, with a strike price of 58.5 cents/SF, has a limited loss of 0.50 cents/SF at spot rates less than 58.5 (“out of the money”), and an unlimited profit potential at spot rates above 58.5 cents/SF (“in the money”).

  2. “At the money” Strike price Break-even price Limited profit Unlimited loss Profit & Loss for the Writer of a Call Option Profit (US cents/SF) + 1.00 + 0.50 0 Spot price (US cents/SF) 57.5 58.0 58.5 59.0 59.5 - 0.50 - 1.00 Loss The writer of a call option on SF, with a strike price of 58.5 cents/SF, has a limited profit of 0.50 cents/SF at spot rates less than 58.5, and an unlimited loss potential at spot rates above (to the right of) 59.0 cents/SF.

  3. “At the money” Strike price “In the money” “Out of the money” Profit up to 58.0 Limited loss Break-even price Profit & Loss for the Buyer of a Put Option Profit (US cents/SF) + 1.00 + 0.50 0 Spot price (US cents/SF) 57.5 58.0 58.5 59.0 59.5 - 0.50 - 1.00 Loss The buyer of a put option on SF, with a strike price of 58.5 cents/SF, has a limited loss of 0.50 cents/SF at spot rates greater than 58.5 (“out of the money”), and an unlimited profit potential at spot rates less than 58.5 cents/SF (“in the money”) up to 58.0 cents.

  4. Strike price Break-even price Limited profit Unlimited loss up to 58.0 Profit & Loss for the Writer of a Put Option “At the money” Profit (US cents/SF) + 1.00 + 0.50 0 Spot price (US cents/SF) 57.5 58.0 58.5 59.0 59.5 - 0.50 - 1.00 Loss The writer of a put option on SF, with a strike price of 58.5 cents/SF, has a limited profit of 0.50 cents/SF at spot rates greater than 58.5, and an uanlimited loss potential at spot rates less than 58.5 cents/SF up to 58.0 cents.

  5. Strike Price of $1.70/£ -- Valuation on first day of 90-day maturity -- 5.67 Total value 4.00 3.30 1.67 Time value Intrinsic value Option Pricing and Valuation Option Premium (US cents/£) 6.0 5.0 4.0 3.0 2.0 1.0 0.0 1.66 1.67 1.68 1.69 1.70 1.71 1.72 1.73 1.74 Spot rate ($/£)

  6. Exhibit 7.1 Mexican Peso Futures, US$/Peso (CME)

  7. Exhibit 7.2 Currency Futures and Forwards Compared

  8. Exhibit 7.3 Swiss Franc Option Quotations (U.S. Cents/SF)

  9. Exhibit 7.4 Buying a Call Option on Swiss Francs

  10. Exhibit 7.5 Selling a Call Option on Swiss Francs

  11. Exhibit 7.6 Buying a Put Option on Swiss Francs

  12. Exhibit 7.7 Selling a Put Option on Swiss Francs

  13. Exhibit 7.9 The Intrinsic, Time, and Total Value Components of the 90-Day Call Option on British Pounds at Varying Spot Exchange Rates

  14. Exhibit 7.10 Foreign Exchange Implied Volatility, January 31, 2002

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