What are the prospects for the option markets?

What does the price of a foreign exchange option depend on?

READING PRACTICE

Ex. 16. Find a table of foreign exchange rates in a daily paper. Which currencies have a higher value relative to the Rouble? How does it affect the situation?

Ex. 17. Read the text quickly to find the types of most widely used swaps:

Foreign Exchange Swaps

Swaps are transactions in which two parties swap financial assets by linking a foreign exchange transaction in cash to an opposite futures business in the same currency.

Foreign Exchange Swap Markets have developed since the early 1980s. The oldest type of swap is the conventional foreign exchange deal whereby one currency is simultaneously bought spot and sold forward against another – meaning an immediate exchange of cash followed by a further reverse exchange at a specified date in the future.

The idea of swapping has now spread further. By far the largest business volume amongst swaps occurs in the so-called "vanilla interest rate swap". A "plain vanilla", or fixed-to-fixed foreign exchange, or currency swap is an exchange of the principal and interest payments associated with a fixed-rate loan in one currency for the principal and interest payments on a similar loan in a second currency. The first such swap between IBM and the World Bank was done in 1981. Since then the swap market has grown to over $ 1 billion and, in the process, has evolved several additional types of currency swaps.

Words you may need:

Foreign Exchange Swap валютный «своп»

to buy spot купить на условиях «спот»

followed by за которым следует...

vanilla interest rate swap «своп» процентный

plain vanilla простой процентный «своп»

evolve v развиваться, эволюционировать

Ex. 18. a) Read the text quickly to find answers to the following questions:

Foreign Exchange Options

Options as a financial instrument have a reasonably short history in financial markets, with the first option contracts being traded in Chicago in 1973. In foreign exchange, a call option on the US dollar is the right to buy the US dollar, and a put option is the right to sell the US dollar. To purchase an option, the buyer has to pay a premium. To write an option, the seller receives a premium.

There are three different types of users of foreign exchange options: the corporate treasury, the fund manager, and the commercial bank trading room. For example, in the currency option markets, the corporate treasury can buy the right, but not the obligation, to sell or buy currency forward, if required. This option, to decide whether to buy or sell currency, is particularly important when the firm is unsure about the timing or size of foreign currency receipts or payment.

International banks, hi their turn, use currency options for their customers and for their own trading. In the past few years, nearly all dealing rooms have seen a large growth in the use of currency options and banks have started employing traders purely to trade currency options for the bank's own account.

Options are also sold "over the counter" (OTC) in a manner similar to currency forward contracts. OTC contracts have very flexible terms arranged by negotiation between the (normal bank) supplier and corporate buyer. Thus the currencies to be bought and sold can vary according to the corporate customer's needs and do not have to correspond to exchange market conventions. Amounts, duration of the option, and price can all be negotiated and matched to the corporate customers' exposure.

The volume of trading on the OTC market between banks is even higher than on the listed options market. There is no public secondary market in OTC currency options but trading is conducted by telephone using prices available on screen systems provided by large international (commercial and investment) banks. MNCs are major users of OTC options and are key participants in the screen markets. These OTC markets are closely linked to spot and forward markets in currency in which the banks and MNCs also play central roles.

The organised currency option exchanges provide an important public pricing mechanism for the MNC treasurer and may also provide a suitable currency option contract for foreign cash flows of known size but uncertain likelihood of occurrence.

The price of a foreign exchange option depends on: the length of a period desired to be covered by the option; the underlying volatility of the foreign exchange market; the relationship between the spot exchange rate and the desired price or the desired strike price; option premium; foreign interest rate.

Moreover, the type of currency option that financial institutions, corporations and the like can trade in vary from the extremely simple to the very sophisticated. It is possible to design tailor-made foreign exchange options to suit requirements, as essentially a foreign exchange option is akin to an insurance premium on the foreign exchange market. All this makes this instrument very attractive.

Within the past fifteen years the use of options has grown in all financial markets. It seems quite likely that foreign exchange options will grow further in coming years.

Words you may need:

call option опцион «колл»

put option опцион «пут»

to write an option исполнить опцион

corporate treasury подразделение в корпорации, занимающееся управлением ее свободными средствами

to sell (buy) forward продать (купить) на срок

convention и конвенция, соглашение

strike price цена исполнения

and the like и тому подобное

tailor-made adj с учетом потребностей заказчика

to be akin (to) быть сродни, быть близким (чему-л.)

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