Profit Loss for the Buyer of a Call

Profit & Loss for the Buyer of a Call Option “At the money” Strike price Profit (US cents/SF) “Out of the money” “In the money” + 1. 00 + 0. 50 0 - 0. 50 Unlimited profit 57. 5 58. 0 Limited loss 58. 5 59. 0 59. 5 Spot price (US cents/SF) Break-even price - 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”). Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 1

Profit & Loss for the Writer of a Call Option “At the money” Strike price Profit (US cents/SF) + 1. 00 + 0. 50 0 Break-even price Limited profit 57. 5 58. 0 - 0. 50 58. 5 59. 0 59. 5 Spot price (US cents/SF) Unlimited loss - 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. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 2

Profit & Loss for the Buyer of a Put Option “At the money” Strike price Profit (US cents/SF) “In the money” “Out of the money” + 1. 00 + 0. 50 0 Profit up to 58. 0 57. 5 58. 0 - 0. 50 - 1. 00 58. 5 59. 0 59. 5 Limited loss Spot price (US cents/SF) Break-even price 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. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 3

Profit & Loss for the Writer of a Put Option “At the money” Profit (US cents/SF) Strike price + 1. 00 + 0. 50 0 Break-even price 57. 5 58. 0 Limited profit 58. 5 59. 0 59. 5 Spot price (US cents/SF) - 0. 50 - 1. 00 Unlimited loss up to 58. 0 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. Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 4

Option Pricing and Valuation Option Premium (US cents/£) 6. 0 Strike Price of $1. 70/£ -- Valuation on first day of 90 -day maturity -5. 67 Total value 5. 0 4. 0 3. 30 3. 0 2. 0 1. 67 Time value Intrinsic value 1. 0 0. 0 1. 66 1. 67 1. 68 1. 69 1. 70 1. 71 1. 72 1. 73 1. 74 Spot rate ($/£) Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 5

Exhibit 7. 1 Mexican Peso Futures, US$/Peso (CME) Copyright © 2006 Pearson Addison-Wesley. All

Exhibit 7. 2 Currency Futures and Forwards Compared Copyright © 2006 Pearson Addison-Wesley. All

Exhibit 7. 3 Swiss Franc Option Quotations (U. S. Cents/SF) Copyright © 2006 Pearson

Exhibit 7. 4 Buying a Call Option on Swiss Francs Copyright © 2006 Pearson

Exhibit 7. 5 Selling a Call Option on Swiss Francs Copyright © 2006 Pearson

Exhibit 7. 6 Buying a Put Option on Swiss Francs Copyright © 2006 Pearson

Exhibit 7. 7 Selling a Put Option on Swiss Francs Copyright © 2006 Pearson

Exhibit 7. 9 The Intrinsic, Time, and Total Value Components of the 90 -Day Call Option on British Pounds at Varying Spot Exchange Rates Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 13