FINS3616 Lecture Notes - Lecture 6: Downside Risk, Call Option, Credit Risk
Document Summary
$ interest rate difference: 8. 75% - 7% = 1. 75% Pound interest rate difference: 9. 5% - 9% = 0. 5% 1. 75% - 0. 5% = 1. 25% (total net savings from both companies combined) Seller gives buyer a right in exchange for a premium. Terminology: long vs. short; call vs put; payoff vs premium; exercise vs. lapse. Frequency of delivery often settled by actual delivery. Settlement is made daily with profits and losses accrued daily. Bid-ask spread (but difficult to trade the contracts) Required for all participants (to protect the exchange) Not credible enough to avail themselves of the forward market (recall counterparty risk) Elimination of some currency risk + upside potential. Therefore, 10m euros divided by 0. 125m euros = 80 contracts. So, ti can use 80 currency futures to hedge its exchange risk: explain how ti can use currency options to hedge its exchange risk. Therefore, 10m euros divided by 0. 0625m euros = 160 contracts.
