Forum Archive Index - June 2002

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi trader,
 
>
>
>An option contract gives the holder the right but not the obligation
>to deliver a specified amount of currency at a specified price (spot
>adjusted for interest differential) at a specified future a date.
> 
>If the future spot rate is superior to the rate nominated in the
>option the option holder can simply let it lapse.  In order to have
>this right the option purchaser will typically pay a premium
>although it is possible to sell another option back to the bank
>(this structure is called a zero cost collar).
> 
>Options premiums are determined by the strike price, the volatility
>of the underlying currency and the time to maturity of the option.
> 
> 

So taking out a currency option is an option (sic) to taking out a 
hedge?   Is the option always more expensive?   Or if you are taking 
out an option aganist an extremely stable currency, yet the 
prevailing interest rates of both currencies are quite different is 
it possible that an option might be cheaper than a hedge?

SNOOPY



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