Options

The Upside Without Downside

Prof Mahesh Kumar

Amity Business School
profmaheshkumar@rediffmail.com
What is an option?
 An option confers on the buyer the eligibility to
buy or sell a sum of the foreign currency at a
pre determined rate on a future date without
an obligation to do so.
 On the due date the buyer of the option may
elect to buy/ sell as per his entitlement or he
may choose to let it go unused.
 Either of the decision is binding on the seller,
who has no discretion.
Features of Options Contract
1) Parties:
Parties There are two parties to option
contract- the option buyer and the option
seller. The option buyer is the holder of the
right under the contract either to buy or sell
an asset by certain date for a certain price.
Normally it would be exporter or importer or
corporate treasurer who would be buying the
options. The option seller also known as the
writer of the option makes the right available
to the buyer. Normally the writer of the
options will be the bank which provides the
instrument to its customers.
Features of Options Contract
2. Call and Put Options:
Options A contract under which
the option buyer has the right to purchase the
specified currency is called the call option. A
contract conferring the right to the buyer to
sell the specified currency is called the put
option. Generally, the US dollar is the base
currency and the other currency of the
contract is the foreign currency that is being
bought or sold.
Features of Options Contract
3) Premium: Premium is the fee payable by the
buyer of the option to the seller at the time of
entering into the contract. The premium paid is
not refundable whether the buyer ultimately
exercises his right or not. The major factors
which influence premium of an option are:
a) The difference between the exercise price and
the spot price.
b) The maturity periods.
c) Volatility of price movements.
d) Interest rates etc.
Features of Options Contract
4) Strike Price:
Price The exchange rate at which the
currencies are agreed to be exchanged under
the contract is the strike price.
5) Maturity Date:
Date The date on which the contract
expires is the maturity date.
6) Execution: Based on the period when the
buyer can exercise his right of contract options
are classified into two types viz. European
Options and American Options. European
Options can be exercised only on the maturity
date while American options can be exercise
on any date during the currency of the
contract.
Difference between forward futures and options
 Forwards/ Future  Option
 Both the parties have  The holder of the
committed to some option has the right
action. but not the obligation
to some action.

 It costs a trader  Purchase of an option

nothing (except for the requires an upfront
margin requirements) fees.
to enter into forward
or futures contract.
Types of Options
There are two basic types of options:
1. A call option which gives the holder of the
option the right to buy an asset by a certain
date for certain price.
2. A put option gives the holder of the right to
sell an asset by a certain date for a certain
price.
Option Type Buyer of Option Writer of Option
(Long Position) (Short Position)
Call Right to buy an asset Obligation to sell asset
Put Right to sell an asset Obligation to buy asset
Types of Options
 The date specified in the contract is known as
the expiration date, the exercise date, the
strike date or the maturity.
 The price specified in the contract is known as
the exercise price or strike price.
 American option can be exercised at any time
up to the expiration date.
 European option can be exercised only on the
expiration date itself.
 Most of the options traded on exchange are
American.
Option Positions
There are four types of option positions:

1. A long position in a call option.

2. A long position in a put option.
3. A short position in a call option.
4. A short position in a put option.
Payoffs from Options
What is the Option Position in Each Case?

K = Strike price, ST = Price of asset at maturity

Payoff Payoff
K
K ST ST
Long call Short Call

Payoff Payoff
K
K ST ST
Long Put Short Put
Options: A Zero Sum Game
Write & Purchase Call Option:

Profit and Loss

Long Call

Zero-Sum-Game
Premium Earned
x
Stock Price at Expiration

Premium Paid

Short Call
Options: A Zero Sum Game
Write & Pull Call Option:

Profit and Loss

Long Put
Premium Earned
Stock Price at Expiration

Premium Paid
Short Put
Terminology
Options are referred to as:
1. In-the-money:
In-the-money an option which would give the holder a
positive cash flow if it were exercised immediately.
2. At-the-money:
At-the-money an option which would lead to zero cash
flow if it were exercised immediately.
3. Out-of-the-money:
Out-of-the-money an option which would lead to a
negative cash flow if it were exercised immediately.

If S is the stock price and X is the strike price then,

Condition Call Option Put Option

S>X In the money Out of money
S=X At the money At the money
S<X Out of money In the money
Terminology
 All options of the same type (calls or puts) are
referred to as an option class e.g. SBI calls are
one class whereas SBI puts are another class.
 An option series consists of all the options of a
given class with the same expiration date and
strike price. In other words, an option series
refers to a particular contract that is traded.
The SBI 50 calls are an option series.
The Underlying Asset
 The asset that can be bought or sold with an
option is known as the underlying asset, or
simply, the underlying. There is a wide variety
of assets on which options are traded the
world over and include:
1. Agricultural commodities
2. Foreign currencies
3. Interest rates
4. Stock indices and individual stocks (as of now
31 stocks permitted).
5. Futures
Types of Options
Three types of options are available:
a) OTC options
b) Exchange Traded Options
c) Options on Futures
Over-the-counter (OTC) Options
 They are available with individual banks.
 They are tailor made to the requirements of
the buyer with regard to the maturity, price
and size of the contract.
 Buyer bears the counterparty risk.
 Confined to large volumes and between big
players.
 Since it is a non standard variety premiums are
high.
Exchange Traded Options
 Traded at organized exchange.
 Contract in standard maturities and standard
amounts.
 The contract is with the clearing house of the
exchange therefore counterparty risk is
minimized.
Options on Futures
 Future contract is the underlying security.
 A futures option is the right, but not the
obligation, to enter into futures contract at a
certain future price by a certain date.
 A call futures option is the right to enter into a
long futures contract at a certain price.
 A put futures option is the right to enter into a
short futures contract at a certain price.
Example for Call Future Option
 An investor has bought a July call future option
on gold with a strike price of $300 per ounce.
The contract size is 100 ounces of gold.
 Suppose the investor exercises the option when
July gold futures price is $340 and the most
recent settlement price is $338
 When the investor exercises future call option,
the investor receives a long futures contract
plus a cash amount equal to (338-
300)*100=$3800. The investor decides to close
out the long futures position immediately for a
gain of (340-338)*100=$200. The total payoff
from the decision to exercise is therefore $4000
Example for Put Futures Option
 An investor buys September put futures option
contract on corn. The contract size is 5000
bushels. The strike price is 200 cents.
 The investor exercises when the September
corn future price is 180 and the most recent
settlement price is 179.
 The investor receives a short futures contract
plus cash amount of (2-1.79)*5000=$1050.
The investor decides to close out the short
futures position immediately for a loss of
(1.80-.79)*5000=$50. The total payoff from
the decision to exercise is therefore $1000
Reasons for Popularity of Futures Options
 Future contracts are more liquid and easier to
trade than the underlying asset.
 Future price is known immediately from trading on
futures exchange whereas the spot price of the
underlying asset may not be readily available.
 When exercising the futures option, it does not
lead to the delivery of the underlying asset and
are normally settled in cash.
 The futures option and futures are traded in pits
side by side in the same exchange. This facilitates
hedging, speculation and arbitrage. It also tends
to make markets more efficient.
 Futures option tend to entail lower transaction
costs than spot options in many situations.
Pay-Off Under Options
 The peculiarity of options is that the buyer has
the right to exercise his right without obligation
whereas seller has only obligation.
 For the buyer of the option, the extent of loss
is limited to the premium paid whereas
theoretically there is no limit on profit he can
make.
 For the seller of the option the maximum gain
is limited to the premium received whereas the
extent to which he can lose is unlimited.
Execution of Contracts
 Based on the prevailing spot price the
execution of option contract may be
considered:
a) In-the-money options
b) Out-of-the-money options
c) At-the-money options
In-the-money Options
 An option is in-the-money if it would be
advantageous for the holder of the option to
exercise his right.
 A call option is in-the-money if on the maturity
date the spot price of the currency being
bought is higher that the strike price under the
option contract.
 A put option is in-the-market, if at maturity the
spot price of the underlying currency is cheaper
than the strike price under the contract.
 The difference between the option price and
the spot price on maturity is know as the
intrinsic value of the option.
Out-of-the money Options
 An option is out of the money if it is not
advantageous for the buyer to exercise his right.
 A call option is out of the money if the spot price
for the currency bought under option is lower that
the strike price agreed under the contract.
 A put option is out of the money on the maturity
date where the spot price for the currency sold is
higher than the strike price under the option
contract.
 When the option is out of the money, the buyer
does not exercise his right and the seller stands to
gain by the premium he received under the
contract.
At-the-money Options
 An option contract is at-the-money when the
strike price is equal to the spot rate for the
currency concerned on the due date of the
contract. It makes no difference to either of the
parties whether exercises the option or not.
Intrinsic Value and Time Value
The premium or the price of the option is made of two
components:
1. The intrinsic value also termed as parity value.
2. The time value also termed as premium over parity.

 The intrinsic value refers to the amount by which it is in

money if it is in-the-money.
 An option which is out-of-money or at-the-money has a
zero intrinsic value.
Intrinsic Value and Time Value

 For a call option, which is in-the-money, the intrinsic

value is the excess of stock price (S) over the exercise
price (X) while for at-the-money and out-of-money
option, the intrinsic value is zero. Symbolically it is
represented as:
Intrinsic value of call option = Max(0,S-X)

 In case of an in-the-money put option, the intrinsic

value is represented as Max(0,X-S)
Intrinsic Value and Time Value
 Often it is optimal for the holder of an in-the-money
option to wait rather than exercise immediately. The
option is then said to have time value.
 The time value of an option is the difference between
the premium of the option and the intrinsic value of the
option.
 For a call or put option, which is at-the-money or out-
of-money, the entire premium amount is the time
value.
 For an in-the-money option, time value may or may not
exist. In case of a call which is in-the-money, the time
value exists if the call price, C, is greater than the
intrinsic value, S-X
Intrinsic Value and Time Value
 Generally, other things being equal, the longer the time
of call to maturity, the greater shall the time value be.
Time value of a call=C-Max(0,S-X)
Time value of a put= P-Max(0,X-S)
Consider the following data about calls on a stock:
Option Exercise Stock Call Classification
Price (X) Price (S) Option Price (C)
1 Rs.80 Rs.83.50 Rs.6.75 In the money
2 Rs 85 Rs.83.50 Rs.2.50 Out of money
Find the intrinsic value and time value of the stock.
Option Stock Exercise Call Intrinsic Val Time Value
Price (S) Price (X) Option Price (C) Max (0,S-X) C- Max(0,S-X)
1 Rs.83.50 Rs.80 Rs.6.75 Rs.3.50 6.75-3.50=Rs.3.25
2 Rs.83.50 Rs.85 Rs.2.50 0 2.50-0=Rs.2.50
Determinants of Option Value
 The intrinsic value of option depends on:
1. Spot rate
2. Strike price
3. Expiration date (time to expiration)
4. Risk free rate in the domestic currency.
5. Risk free rate of interest in foreign currency
6. Volatility of the spot rate
Determinants of Option Value
1. Spot rate: The effect of this variable on the option price
is quite evident. In the case of call option, the higher
the spot rate, the higher the option premium and vice
versa. A put option becomes less valuable with the rise
in spot price and vice versa.
2. Strike Price: Strike price is the price at which the deal
will take place when the option (call or put) is
exercised. A call option tends to vary inversely with the
strike price. With the rise in strike price the call option
tends to lose value. This is because the holder stands to
lose when he exercises the call option. A put option
moves in direct relation with the strike price and with
the rise in strike price, the holder tends to gain on
exercising the option.
Determinants of Option Value
3. Time to expiration: With the increase in the
time to expiration, both call and put options
gain value. This is because the option with a
longer time to expiration, other things being
held constant, will have a higher time value.
Option and Option Clearing Corporation (OCC)
 The provisions specified in the options contract are
guaranteed by the Options Clearing Corporations.
 The option clearing corporations act as an
intermediary between buyers and sellers by issuing
standardized options and by ensuring that the
options contracts are honoured.
 OCC by itself does not buy and sell options (like
market makers) but comes into picture only after
two parties trade a contract. It takes an opposite
position to each of the traders- a short position in
respect of the party with long position and a long
position against a party with short position.
 Buyer of an option relies on the OCC for the
fulfillment of contractual obligations. Similarly option
writer has an obligation to the OCC.
Option and Option Clearing Corporation (OCC)
 The first organized market in options in
currencies opened in Philadelphia in 1982.
 Many other markets have since developed for
example, at Amsterdam, London, Paris,
Montreal, Vancouver, New York, Chicago,
Singapore etc.
Open Interest
 The number of outstanding positions at a given
time is known as open interest.
 The open interest in an option contract is an
index of its liquidity.
 The financial press regularly publishes
information on the open interest position in
addition to the usual price data.
Exercise of Option
 Most of the option holders do not exercise their options
because they do not want to take a position in the underlying
stock and investors make a closing transaction to effectively
cancel their positions.
 However when an option holder decide to exercise an option,
the Clearing Corporation randomly assigns the exercise notice
to an option writer, which typically a brokerage firm. The
brokerage firm, in turn, assigns it to one (or more) of their
customers who wrote the option.
 It is important to note that once an exercise notice is issued to
a particular writer, the writer is not allowed to cancel out the
position by using a closing transaction. Thus the writer carries
the risk that the option may be exercised and that he may be
called upon to make a delivery. However this does not pose a
difficulty if the underlying asset is freely traded in the market.
Covered and Naked Calls
 If the holder of a call decides to exercise the call, then the
writer of the call has the obligation to sell the underlying
asset to the holder of the call at the strike price.
 The writer of the option would receive an amount equal to
the exercise price.
 The call writer may or may not be holding the underlying
asset.
 If a call writer own the asset underlying the call, he is said
to have written a covered call.
 If a call is written where the writer does not have the asset
underlying the call option, the call is said to be naked call.
 Similarly in case of put option, if the holder of the option
decides to exercise the option, the put writer is obliged to
accept the underlying asset at the strike price.
Margin Requirements
 The performance of option contracts is assured by the OCC.
 In order to ensure that the writer of a naked call can fulfill
the terms of the contract, margin requirements exist.
 The writers of option are required to meet the margin
requirements. The margin requirements vary depending
upon the brokerage firm, the price of the underlying asset,
the price of the option and whether the option is call or put.
 As a general rule, initial margins are at least 30% of the
security price when the option is written plus the intrinsic
value of the option.
 Margin has an influence on the degree of financial leverage
that the investor has and consequently on the return and
risk on the position.
Buyer-Seller Attitudes
 Call holders- Bullish
 Call writers- Bearish
 Put holders- Bearish
 Put writers- Bullish
Options- As Tool for Hedging
 An exporter who expects to execute the contract
and receive foreign exchange after six months can
enter into put option for six months which entitles
him to sell the foreign currency on maturity at an
agreed pre determined price. If on maturity, the
spot price for the currency is more favorable to
the exporter he may not choose to exercise his
eight of selling under the contract and can instead
sell in the market at the spot rate.
 Similarly an importer can enter into ‘call option’
entitling him to buy foreign currency at the future
date.
Options- As Tool for Hedging
 Option contract is useful especially in covering
foreign exchange risk under contingent
conditions like when company enters into bids
and where other methods of hedging like
forward contract may prove to be costly.
Option Products Available In India
 Banks in India are permitted to offer options of
plain vanilla European type.
 Pure vanilla type options are pure call and put
options.
 Apart from pure vanilla type products, Banks
are also allowed to sell some exotic products,
some which are explained in the subsequent
slides.
Barrier Options
 Barrier options take effect or are canceled
when a particular level in the spot rate is either
reached or breached.
 Two types of barrier options- Knock - in options
and knock-out options.
Barrier Options: Knock In Options
 Knock-in option becomes effective when the
spot rate reaches a particular rate.
 The reaching of the specified level may be from
a higher level to a lower level. In this case the
option will be valid when the spot rate is below
the specified level. Such option is ‘down-and-in’
option.
 If the option is to become effective when the
spot rate is to be reached from below and the
spot rate are above the specified level. Such
option is ‘up-and-in’ option.
Barrier Options: Knock Out Options
 Knock out options become effective when the
specified spot rate level is breached.
 The breach can occur from above, in which
case the option is ineffective when the spot
rate is below the specified level. The option is
‘down-and out’ option.
 An option which becomes ineffective when the
spot rate goes above a specified level is an ‘up-
and-out’ option.
Participating Forwards
 The disadvantage of forward contract is that an
exporter or importer who hedges his position
by this instrument is not able to benefit from
favorable movements in exchange rate,
although he gets complete protection from
unfavorable movements.
 Participatory forward is an arrangement
whereby the hedger is able to get protection
from unfavorable movements in exchange rate
as under a forward contract and also share
gains in the favorable movements.
 The participatory forward is a cost effective
arrangement.
Example: Participatory Forwards
 Let us say that an exporter in India has a
receivable of USD 10 lakhs due in 3 months
The three months forward rate is Rs. 46.55 per
dollar.
 If he books a forward contract, he will get Rs.
46.55 per dollar on due date irrespective of the
spot rate prevailing. If the spot rate on the due
date is Rs. 46.40 his notional gain is 15 paisa
per dollar. If the spot rate is Rs. 46.80, his
notional loss is 25 paisa per dollar.
Example: Participatory Forwards
 If he enters into a participating forward under
which he gets full protection against dollar
depreciating below 46.55 and also gain, say
40%, in its appreciation above this level.
 Suppose the spot rate on due date is Rs. 46.40.
The entire USD 10 lakhs will be purchased by the
bank at Rs. 46.55.
 If the spot rate is Rs. 46.80, 60% of USD 10
lakhs will be bought by the bank at Rs. 46.55
and the balance 40% at the spot rate of Rs.
46.80.
 Thus the hedger in this case is able to participate
in the favorable movement in the rate by 40%
Example: Participatory Forwards
 The mechanism underlying this mechanism is,
the exporter will buy put option for USD 10
lakhs at Rs. 46.55. He will sell call option for
USD 6 lakhs at the same strike price of 46.55
 Suppose the spot rate on the due date is Rs.
46.40. The exporter will find that it is beneficial
to exercise his right under the put option he
bought with the strike price of Rs. 46.55. Thus
he gets Rs. 46.55 per dollar on the entire USD
10 lakhs. The bank which has bought from him
the call option for USD 6 lakhs will find that the
option is out-of-the-money and let it expire.
Example: Participatory Forwards
 If the spot rate is Rs. 46.80 the exporter will
find it not advantageous to exercise his put
option and let it expire. The bank will find its
call option is in-the-money and buy USD 6
lakhs at Rs. 46.55, the strike price under the
option. The balance USD 4 lakhs will be
purchased by the bank at the market rate of
USD 46.80.
Range Forwards
 Range Forwards are similar in structure to
participating forwards. It involves simultaneous
buying and selling of call and put option. This
variant of option is used when the exporter
wishes to reduce the cost of the option and is
also willing to limit his gain from the possible
fluctuation in the currency.
Range Forwards- Example
Now if the exporter wishes to reduce the cost of
the option and is willing to limit his gains then
 He can write (i.e. sell) a USD call/yen option to
his bank for USD 1 million, say at strike price of
USD1= YEN 110. Under the option the bank has
the option to buy USD 1 million at the strike rate
at the end of sixth month.
 The customer can collect the premium say of USD
40000 from the bank for writing this option.
 If the premium received is USD 40000 then the
net cost of both the option is USD 10000
Range Forwards- Example
 If an exporter expects to receive USD 1 million in
6 months’ time and decides to receive it as yen
and his break even is 105 yen per dollar, he may
buy USD put/yen option of USD 1=105 yen i.e. he
can sell dollar to the bank at this rate).
 For buying the put option, the exporter pays the
premium of USD 50000. This is the cost of the
option.
 If the dollar appreciates and on the due date the
rate is USD1 = Yen 120, he will not exercise the
option and prefer to receive the higher value of
Yen at the spot rate.
 If the Yen appreciates and the rate on the due
date is USD 1= Yen 100, he will exercise the
option.
Range Forwards- Example
The underlying mechanism is:
 Let us say the exchange rate on the due date is
USD1 =YEN 120. The exporter will not exercise
the option. But the bank will exercise its option to
buy dollars at Yen 110. The customer will receive
Yen 110 million from the bank for the export
proceeds.
 If the exchange rate turns out to be Yen 100, the
exporter will exercise his option and require the
bank to pay his Yen 105 million against the
remittance. It would not be advantageous for the
bank to exercise its call option at this price.
 Thus under the range option, the exporter gets
protection from exchange fluctuation in the range
of Yen 105-110.
Ratio Range Forwards
 Ratio Range Forwards is a more flexible
variation of range forwards. It is a combination
of straight forward option and range forward
options. The main difference is that the
amounts of the option bought and sold are
different. The ratio of the two amounts can be
so chosen as to bring down the net payment of
premium even to zero.
Option Tunnel with Zero Premium
 Since the premium represents a non-negligible
cost, banks propose to their clients the option
with zero premium called tunnel but protection
is available within certain limits.
Illustrative Tunnel with Zero Premium
Maturity Narrow Range Wider Range
1 month 35.00-35.60 34.25-36.25
2 month 35.50-36.00 34.00-36.30
3 month 35.75-36.35 33.80-36.50
Option Tunnel with Zero Premium
 An Indian importer buys a 1 month tunnel with zero
premium, of narrow range. This implies that if after a
month’s time the dollar rate is INR 35.70 he would pay
INR/USD is 35.60
 But on the other hand if the dollar rate is INR 34.90 he
will have to pay Rs.35 per dollar.
 If the dollar price is established somewhere within the
range, then he would have to pay actual market price.
 The importance of tunnel lies in the fact that one does
not have to pay premium but at the same time time do
not allow the operator to get the full advantage of a
favorable evolution of rates.
Factors Affecting Currency Call Option
Premium
There are three determinants affecting call
option premium:
a) Level of the existing spot price relative to the
strike price:
price The higher the spot rate relative to
the strike price, the higher the call option price
will be, This is due to higher probability of
buying the currency at substantially lower rate
than what you would sell it for.
Factors Affecting Currency Call Option
Premium
b) Length of time before the expiration date: date It is
generally expected that the spot rate has a greater
chance of rising high above the strike price if it has a
longer period of time to do so. Thus call options with
higher duration are priced higher than those with shorter
duration.
c) Potential Variability of Currency:
Currency The greater the
variability of the currency, the higher the probability that
the spot rate will be above the strike price. Thus the
more volatile currencies have higher call option prices.
Factors Affecting Currency Put Option
Premium
There are three determinants affecting call
option premium:
a) Level of the existing spot price relative to the
strike price:
price The lower the spot rate relative to
the strike price , the more valuable the put
option will be, because there is a higher
probability that the put option will be exercised.
Factors Affecting Currency Put Option
Premium
a) Length of time before the expiration date:
date A
longer period creates a higher probability that
the currency will move into range where it will
be feasible to exercise the option ( whether it is
put or call ). Thus longer the time to expiration,
the greater the put option premium will be.
b) Potential Variability of Currency:
Currency The greater
the variability of the currency, the greater the
put option premium will be, again reflecting
higher probability that the option may be
exercised.
Example
 A French importer has bought an equipment
from a US firm for USD 1 million on 1 March in
the current year to be paid for in 3 months. The
importer fears an appreciation of the USD. He
decides to cover himself in the ‘option market’.
The data are:
Exchange rate FFr/USD is 5.00 or USD/FFR is
0.20
He is considering call option for the purpose as
he will be required to buy foreign exchange
(USD). The characteristics of call option are:
Strike price FFr/USD is 5.05
Maturity date 1st June
Premium 3 percent
Example
 A French importer has bought an equipment
from a US firm for USD 1 million on 1 March in
the current year to be paid for in 3 months. The
importer fears an appreciation of the USD. He
decides to cover himself in the ‘option market’.
The data are:
Exchange rate FFr/USD is 5.00 or USD/FFR is
0.20
He is considering call option for the purpose as
he will be required to buy foreign exchange
(USD). The characteristics of call option are:
Strike price FFr/USD is 5.05
Maturity date 1st June
Premium 3 percent
Solution
 The buyer of the call option i.e. importer pays
the premium amount of USD 30000 (=1
million*0.03) or FFr 150000 (=30000*5).
 On 1st June there are three possibilities:
a) The currency has appreciated and the spot rate
is FFr 5.5/USD. In this situation, the holder of
the call option will exercise the option and buy
the dollars at the strike price of FFr 5.05/USD.
He will thus buy FFr 5.05 million (=5.05*1.0
million)
Total cost =(5050000+150000) FFr
= 5.20 million FFr
Thus, his net price is FFr/USD 5.20 instead of
5.50
Solution
b. The US currency has undergone a depreciation
and on 1st June, it is FFr 4.75/USD
 In this situation, he abandons his call option
and buys dollars from the market at FFr
4.75/USD. His total payment is thus
(4.75*1.O million +0.15 million) FFr
=4.90 million FFr
Thus his net price is FFr/USD is 4.9 instead of
USD 4.75
Solution
c) The US dollar is at FFr 5.05. Here he can afford
to be indifferent to either the market option or
call option. He will pay the dame price whether
he resorts to one or to the other. He pays:
(5050000+150000) FFr.
=5.20 million FFr.
 This implies he has never to pay more than FFr
5.20 million, whatever be the level of
appreciation of the USD.