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Exam guide

9.4.1 Foreign Currency Option Features
• Issued by the Philadelphia Stock Exchange
• Strike Prices: Usually quoted in U.S. cents (.01). There are two excep- tions, one being the
French Franc which is quoted as .001 (French Franc has two F’s so remember two zeros). The
other exception is the Japa- nese Yen which is quoted as .0001 (Yen has three letters so
remember three zeros).
• Contract Size: This will be given to you in the exam question. As an example, the contract size
for a British Pound contract covers 31,250 pounds. Each currency has its own contract size.
• Expiration Date: Foreign currency options expire on the Friday preceding the third
Wednesday of the month.
• Settlement Date: Fourth business day after tender of the expiration notice.
• Strategies: If an investor believes the value of a currency is going to rise, he/she would buy
calls or sell puts on the currency. If an investor expects the value of currency to fall, puts would
be bought and calls can be sold. Foreign Currency Inverse Relationship
It is important to remember for both option, hedging and economic exam questions that there
is an inverse relationship between foreign curren- cies and the U.S. dollar.
• If the dollar is rising, foreign currencies are falling, so buy puts on the foreign currency.
Remember, there are no options available on the U.S. dollar.
• If the dollar is falling, foreign currencies are rising, so buy calls on the foreign currency. Foreign Currency Option Examples
1. A Canadian Dollar currency option is quoted at a premium of .5. If 50,000 Canadian Dollars
underlie the contract, what dollar price does the premium represent?
Take the premium of .5 and multiply it times the 50,000 contract size and multiply the results
times the strike price of .01. Answer is $250