Are foreign currency options overvalued? The early experience of the Philadelphia stock exchange

✍ Scribed by Laurie S. Goodman; Susan Ross; Frederick Schmidt

• Publisher: John Wiley and Sons
• Year: 1985
• Tongue: English
• Weight: 558 KB
• Volume: 5
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.3990050306

✦ Synopsis

he Philadelphia Stock Exchange began trading options on British pounds in T December of 1982. Options trading in four other actual currencies-Canadian dollars, German marks, Swiss francs, and Japanese yen-commenced in February, 1983. These markets are worthy of careful study as they add another dimension to foreign exchange trading. In particular, they offer market participants a risk-return tradeoff which cannot be replicated with a static strategy using existing spot or forward markets.

Consequently, options can serve as useful hedges in situations where forward contracts cannot. Options are ideally suited to hedge a potential transaction which is not certain to occur. Consider a firm which must submit a competitive bid in a foreign currency and is unsure that its bid will be accepted. Buying a put option in the foreign currency hedges this risk. If the bid is not accepted, the option can be allowed to lapse (or can be sold or exercised, if it is profitable). If the bid is

The views expressed in this article are strictly those of the authors and do not represent the opinions of Citibank, 'An excellent description of the characteristics of foreign currency options can he found in .

the Federal Reserve Bank of New York, or the Federal Reserve System.