Options, Futures, and Other Derivatives, 10th Edition

17.2 CURRENCY OPTIONS

Currency options are primarily traded in the over-the-counter market. The advantage of this market is that large trades are possible, with strike prices, expiration dates, and other features tailored to meet the needs of corporate treasurers. Although currency options do trade on NASDAQ OMX in the United States, the exchange-traded market for these options is much smaller than the over-the-counter market.

An example of a European call option is a contract that gives the holder the right to buy one million euros with U.S. dollars at an exchange rate of 1.1000 U.S. dollars per euro. If the actual exchange rate at the maturity of the option is 1.1500, the payoff is $\text{1,000,000}\times \left(1.1500-1.1000\right)=\text{\$50,000}$. Similarly, an example of ...