ADMS 1000 Lecture Notes - Lecture 12: Call Option, Pound Sterling, Spot Contract

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ADMS 1000 Full Course Notes
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ADMS 1000 Full Course Notes
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If the currency options market is efficient, then the premiums on currency options properly reflect all available information. Contingency graph for the purchaser of a call option. A contingency graph for the purchaser of a call option compares the price paid for that option to the payoffs received under various exchange rate scenarios. Observe that if the future spot rate is . 50 or less then the net gain per unit is $. 02 (ignoring transaction costs). This represents the loss of the premium per unit paid for the option, since the option would not be exercised. The currency options market is efficient, and then the premiums on currency options properly reflect all available information. Under such conditions, it may be difficult for speculators to consistently generate abnormal profits when speculating in this market. Research has found that, when transaction costs are controlled for, the currency options market is efficient.

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