option trading in future

Jun 28th, 2015
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A. T. Still University
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Foreign currency options arise in international finance in three principal contexts. The first is organized trading on an exchange. A number of exchanges have trading in at least one foreign currency option, but presently the FX option market at the Philadelphia Stock Exchange (PHLX) is the broadest.

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Journal of International Money and Finance (1983), 2, 239-253The Pricing of Call and PutOptions on Foreign ExchangeJ. ORLIN GRABBE*The Wharton School, University of Pennsylvania,Philadelphia P A 19104, USAThis paper derives pricing equations for European puts and calls on formgnexchange. The call and put pricing formulas are unhke the Black-Scholesequations for stock options in that there are two relevant interest rates,interest rates are stochastic, and boundary constraints differ. In ad&tion, it isshown that both American call and put options have values larger than theirEuropean counterparts.This paper develops pricing relationships for European and American call and putoptions on foreign currency. Foreign exchange (FX) options have features thatdistinguish them from options on common stock. Consequently, commonly usedmodels for pricing stock options, such as the popular Black Scholes model, areinadequate for FX options.Some previous studies have also looked at foreign currency option pricing.Feiger and Jacquillat (1979) attempt to obtain foreign currency option prices byfirst pricing a currency option bond. They are not able, however, to obtain simple,closed-form solutions by this procedure. Stulz (1982) looks also at currency optionbond pricing, but his paper is primarily concerned with the question of default riskon part of a contract, and it is not easy to grasp the fundamentals of foreign currencyoption pricing in the context of his more gene

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