To whomsoever it may concern

Date:
This is to certify that the Research Project of MBA entitled, OVERVIEW OF CURRENCY OPTION, done by Mr. Ankush Garg Roll NO. 108004 is a bonafide work carried out by him under my guidance. The matter embodied in this project work has not been submitted in our college earlier for award of any degree or diploma to the best of my knowledge and belief.

Faculty guide: Rajesh Garg

Contents
Particulars Title page Certificates Acknowledgements List of tables Ch-1 1.1 1.2 Ch-2 Ch-3 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 Ch-4 Ch-5 Ch-6 Introduction to the topic Companys profile Review of Literature Research Methodology Nature of Study Objectives of Study Research Design Sample Size Sampling Design Scaling Technique Data Collection Significance of the Study Data Analysis and Interpretation Findings & Suggestions Limitations of the Study Bibliography/ References Annexure

Questionnai

ACKNOWLEDGEMENT
A project is a joint effort. I have received the most invaluable help and co-operation from so many of my well wishers. I would like to express my deep sense of gratitude towards all of them. It is great pleasure for me to acknowledge the assistance & contribution of a large no. of individuals to this effort. First, I would like to thank my parents who provided me the much needed courage, patience & moral support & stood behind me at every level of my project. I take this opportunity to express my gratitude to Mr. Rajesh Garg for his invaluable help & guidance throughout the course. Last but not least, I would like to thank all of my friends for their moral & unseen support.

Ankush Garg

CHAPTER-1 INTRODUCTION

An option is a contract written by a seller that conveys to the buyer the right but not the obligation to buy (in the case of a call option) or to sell (in the case of a put option) a particular asset, such as a piece of property, or shares of stock or some other underlying security, such as, among others, a futures contract. In return for granting the option, the seller collects a payment (the premium) from the buyer. For example, buying a call option provides the right to buy a specified quantity of a security at a set strike price at some time on or before expiration, while buying a put option provides the right to sell. Upon the option holder's choice to exercise the option, the party who sold, or wrote, the option must fulfill the terms of the contract. The theoretical value of an option can be evaluated according to several models. These models, which are developed by quantitative analysts, attempt to predict how the value of the option will change in response to changing conditions. Hence, the risks associated with granting, owning, or trading options may be quantified and managed with a greater degree of precision, perhaps, than with some other investments. Exchange-traded options form an important class of options which have standardized contract features and trade on public exchanges, facilitating trading among independent parties. Over-the-counter options are traded between private parties, often wellcapitalized institutions, that have negotiated separate trading and clearing arrangements with each other. Another important class of options, particularly in the U.S., are employee stock options, which are awarded by a company to their employees as a form of incentive compensation.

Other types of options exist in many financial contracts, for example real estate options are often used to assemble large parcels of land, and prepayment options are usually included in mortgage loans. However, many of the valuation and risk management principles apply across all financial options.

Contract specifications
Every financial option is a contract between the two counter parties with the terms of the option specified in a term sheet. Option contracts may be quite complicated; however, at minimum, they usually contain the following specifications:

whether the option holder has the right to buy (a call option) or the right to sell (a put option) the quantity and class of the underlying asset(s) (e.g. 100 shares of XYZ Co. B stock) the strike price, also known as the exercise price, which is the price at which the underlying transaction will occur upon exercise the expiration date, or expiry, which is the last date the option can be exercised the settlement terms, for instance whether the writer must deliver the actual asset on exercise, or may simply tender the equivalent cash amount the terms by which the option is quoted in the market to convert the quoted price into the actual premiumthe total amount paid by the holder to the writer of the option.

Intrinsic value and Time value

The intrinsic value (or "monetary value") of an option is the value of exercising it now. Thus if the current (spot) price of the underlying security is above the agreed (strike) price, a call has positive intrinsic value (and is called "in the money"), while a put has zero intrinsic value. The time value of an option is a function of the value less the intrinsic value. It equates to uncertainty in the form of investor hope. It is also viewed as the value of not exercising

the option immediately. In the case of a European option, you cannot choose to exercise it at any time, so the time value can be negative; for an American option if the time value is ever negative, you exercise it: this yields a boundary condition. ATM: At-the-money An option is at-the-money if the strike price is the same as the spot price of the underlying security on which the option is written. An at-the-money option has no intrinsic value, only time value. ITM: In-the-money An in-the money option has intrinsic value. A call option is in-the-money when the spot price is above the strike price of underlying security. A put option is in-the-money when the spot price is below the strike price. OTM: Out-of-the-money An out-of-the-money option has no intrinsic value. A call option is out-of-the-money when the strike price is above the spot price of the underlying security. A put option is out-of-the-money when the strike price is below the spot price.

Types of options
The primary types of financial options are:

Exchange traded options (also called "listed options") are a class of exchange traded derivatives. Exchange traded options have standardized contracts, and are settled through a clearing house with fulfillment guaranteed by the credit of the exchange. Since the contracts are standardized, accurate pricing models are often available. Exchange traded options include:

1. stock options, 2. commodity options,

3. bond options and other interest rate options 4. index (equity) options, and 5. options on futures contracts

Over-the-counter options (OTC options, also called "dealer options") are traded between two private parties, and are not listed on an exchange. The terms of an OTC option are unrestricted and may be individually tailored to meet any business need. In general, at least one of the counterparties to an OTC option is a well-capitalized institution. Option types commonly traded over the counter include:

1. interest rate options 2. currency cross rate options, and 3. options on swaps or swaptions.

Employee stock options are issued by a company to its employees as compensation.

Option styles
Naming conventions are used to help identify properties common to many different types of options. These include:

European option - an option that may only be exercised on expiration. American option - an option that may be exercised on any trading day on or before expiration. Bermudan option - an option that may be exercised only on specified dates on or before expiration. Barrier option - any option with the general characteristic that the underlying security's price must reach some trigger level before the exercise can occur.

Chicago Board of Trade

Chicago Board of Trade

Type Founded Headquarters Industry Products Owner

Subsidiary 1848 Chicago, Illinois Business Services Options/Futures exchange CME Group

The Chicago Board of Trade (CBOT), established in 1848, is the world's oldest futures and options exchange. More than 50 different options and futures contracts are traded by over 3,600 CBOT members through open outcry and eTrading. Volumes at the exchange in 2003 were a record breaking 454 million contracts. On 12 July 2007, the CBOT merged with the CME under the CME Group holding company and ceased to exist as an independent entity.

History

Trading floor at the Chicago Board of Trade in 1993. The concerns of U.S. merchants to ensure that there were buyers and sellers for commodities have resulted into forward contracts to sell and buy commodities. Still, credit risk remained a serious problem. The CBOT took shape to provide a centralized location, where buyers and sellers may meet and negotiate and formalize forward contracts. In 1864, the CBOT listed the first ever standardized "exchange traded" forward contracts, which were called futures contracts. In 1919, the Chicago Butter and Egg Board[1], a

spin-off of the CBOT, was reorganized to enable member traders to allow future trading, and its name was changed to Chicago Mercantile Exchange (CME). On October 19, 2005, the initial public offering (IPO) of 3,191,489 CBOT shares was priced at $54.00 (USD) per share. On its first day of trading the stock closed up +49% at $80.50 (USD) on the NYSE. In 2007, the CBOT and the CME merged to form the CME Group. The Building Main article: Chicago Board of Trade Building

Board of Trade building Since 1930, the Chicago Board of Trade has been operating out of 141 West Jackson Boulevard, Chicago. It is housed in a building designed by architects Holabird & Root

that is 605 feet (184 m) tall, the tallest in Chicago until the Richard J. Daley Center superseded it in 1965. This Art Deco building incorporates sculptural work by Alvin Meyer and is capped by a 31 foot (9.5 m) tall statue of the goddess Ceres in reference to the exchange's heritage as a commodity market. Ceres is faceless because its sculptor, John Storrs, believed that the forty-five story building would be sufficiently taller than any other nearby structure and as a result that no one would be able to see the sculpture's face anyway. On May 4, 1977, the Chicago Board of Trade Building was designated a Chicago Landmark]. The building is now a National Historic Landmark. Today the Board of Trade Building is closely joined by numerous skyscrapers in the heart of Chicago's busy Loop commercial neighborhood.

The Pit
The pit is a raised octagonal structure where open-outcry trading takes place. The CBOT trading floor contains many such pits. The steps up on the outside of the octagon and the steps down on the inside give the pit something of the appearance of an amphitheater, and allow hundreds of traders to see and hear each other during trading hours. The importance of the pit and pit trading is emphasized by the use of a stylized pit as the logo of the CBOT. "The Pit" is also the title and subject of a classic novel (1903) by Frank Norris . Trades are made in the pits by bidding or offering a price and quantity of contracts, depending on the intention to buy (bid) or sell (offer). This is generally done by using a physical representation of a trader's intentions with his hands. If a trader wants to buy ten contracts at a price of eight, for example, in the pit he would yell "8 for 10", stating price before quantity, and turn his palm inward toward his face, putting his index finger to his forehead denoting ten; if he were to be buying one, he would place his index finger on his chin. If the trader wants to sell five contracts at a price of eight, they would yell "5 at 8", stating quantity before price, and show one hand

with the palm facing outward, showing 5 fingers. The combination of hand-signals and vocal representation between the way a trader expresses bids and offers is a protection against misinterpretation by other market participants. News lines

Board of Trade building

On October 22, 1981, trading was halted on the Chicago Board of Trade and the Philadelphia Stock Exchange after anonymous callers said bombs had been placed in those buildings.

On August 1, 2006, the CBOT launched side-by-side trading for agricultural futures. Orders can now be traded electronically or placed by pit traders using open outcry, creating a single pool of liquidity.

On October 17, 2006, the Chicago Mercantile Exchange announced the purchase of the Chicago Board of Trade for $8 billion in stock, joining the two financial institutions as CME Group, Inc. CBOT currently uses outsourced technology platforms, but will move to CME's Globex trading system. This will provide

much of the merger's anticipated savings. The merger will also strengthen the combined group's position in the global derivatives market.

On July 9, 2007 CBOT Shareholders approve merger with the Chicago Mercantile Exchange "creating the largest derivatives market ever."

American Stock Exchange

NYSE Alternext U.S. U.S. National Historic Landmark

The American Stock Exchange 86 Trinity Pl, Lower Location: Manhattan, New York City, New York 404231N Coordinates: 740045WCoordinates: 404231N Built/Founded: Architectural style(s): Designated 740045W 1921, expanded in 1931 Art Deco as June 2, 1978

NHL: Added to NRHP: June 2, 1978 [3] NRHP 78001867 Reference#: American Governing body: Exchange

Stock

NYSE Alternext U.S., formerly known as the American Stock Exchange (AMEX) is an American stock exchange situated in New York. AMEX was a mutual organization, owned by its members. Until 1953 it was known as the New York Curb Exchange.[4] On January 17, 2008 NYSE Euronext announced it would acquire the American Stock Exchange for $260 million in stock.[5] On October 1, 2008, NYSE Euronext completed acquisition of the American Stock Exchange.[6] Before the closing of the acquisition, NYSE Euronext announced that the Exchange will be integrated with Alternext European small-cap exchange and renamed NYSE Alternext U.S. History The Exchange traces its roots back to colonial times, when stock brokers created outdoor markets in New York City to trade new government-issued securities. The AMEX started out in 1842 as such a market at the curbstone on Broad Street near Exchange Place. The curb brokers gathered around the lamp posts and mail boxes, resisting wind and weather, putting up lists of stocks for sale. As trading activity increased so did the volume of the transactions; the shouting reached such a high level that stock hand signals had to be introduced so that the brokers could continue trading over the din. In 1921 the market was moved indoors into the building at 86 Trinity Place, Manhattan, where it still resides. The hand signals remained in place for decades even after the move, as a means of covenient communication. The building was declared a National Historic Landmark in 1978. Market

AMEX's core business has shifted over the years from stocks to options and Exchangetraded funds, although it continues to trade small to mid-size stocks. An effort in the mid1990s to initiate an Emerging Company Marketplace ended in failure, as the reduced listing standards (beyond the existing lenient AMEX standards) caused penny stock promoters to move their scams to a national exchange. In the mid 1990s the exchange was dogged by allegations of trading scandals, which were highlighted by BusinessWeek in 1999. In 1998, the American Stock Exchange merged with the National Association of Securities Dealers (operators of NASDAQ) to create "The Nasdaq-Amex Market Group" where AMEX is an independent entity of the NASD parent company. After tension between the NASD and AMEX members, the latter group bought out the NASD and acquired control of the AMEX in 2004. Out of the three major American stock exchanges, the AMEX is known to have the most liberal policies concerning company listing, as most of its companies are generally smaller compared to the NYSE and NASDAQ. The Amex also specialises in the trading of ETFs, and hybrid/structured securities. The majority of U.S. listed ETFs are traded at the AMEX including the SPDR and most Powershares. In 2006, the AMEX attempted to popularize an American implementation of the Canadian income trust model. Listed Equity Income Hybrid Securities, (more commonly known as Income Deposit Securities) listed on the AMEX are B & G Foods Holding Corp. (BGF), Centerplate, Inc. (CVP), Coinmach Service Corp. (DRY), and Otelco Inc. (OTT). Recently Coinmach Service Corp, has been attempting to restructure itself away from being an income trust. As of 31 December 2007, the AMEX had 592 listed companies with a combined market capitalization of $258 billion. The AMEX also produces stock market indices; perhaps the most notable of these is an index of stocks of internet companies now known as the Inter@ctive Week Internet Index. Recently, the AMEX has also developed a unique set of indices known as Intellidexes, which attempt to gain alpha by creating indices weighted on fundamental

factors. The AMEX Composite, a value-weighted index of all stocks listed on the exchange, established a record monthly close of 2,069.16 points on November 30, 2006. Located near the World Trade Center, the operation of the AMEX was temporarily affected by the September 11 attacks. The Exchange's operations were temporarily shifted to the Philadelphia Stock Exchange.

Hours
The exchange's normal trading sessions are from 9:30am to 4:00pm on all days of the week except Saturdays, Sundays and holidays declared by the Exchange in advance.

Trading
The most common way to trade options is via standardized options contracts that are listed by various futures and options exchanges. Listings and prices are tracked and can be looked up by ticker symbol. By publishing continuous, live markets for option prices, an exchange enables independent parties to engage in price discovery and execute transactions. As an intermediary to both sides of the transaction, the benefits the exchange provides to the transaction include:

fulfillment of the contract is backed by the credit of the exchange, which typically has the highest rating (AAA), counterparties remain anonymous, enforcement of market regulation to ensure fairness and transparency, and maintenance of orderly markets, especially during fast trading conditions.

Over-the-counter options contracts are not traded on exchanges, but instead between two independent parties. Ordinarily, at least one of the counterparties is a well-capitalized institution. By avoiding an exchange, users of OTC options can narrowly tailor the terms of the option contract to suit individual business requirements. In addition, OTC option transactions generally do not need to be advertised to the market and face little or no

regulatory requirements. However, OTC counterparties must establish credit lines with each other, and conform to each others clearing and settlement procedures. With few exceptions, there are no secondary markets for employee stock options. These must either be exercised by the original grantee or allowed to expire worthless. The basic trades of traded stock options (American style) These trades are described from the point of view of a speculator. If they are combined with other positions, they can also be used in hedging. An option contract in US markets usually represents 100 shares of the underlying security.

Long call
A trader who believes that a stock's price will increase might buy the right to purchase the stock (a call option) rather than just buy the stock. He would have no obligation to buy the stock, only the right to do so until the expiration date. If the stock price at expiration is above the exercise price by more than the premium (price) paid, he will profit. If the stock price at expiration is lower than the exercise price, he will let the call contract expire worthless, and only lose the amount of the premium. A trader might buy the option instead of shares, because for the same amount of money, he can obtain a much larger number of options than shares. If the stock rises, he will thus realize a larger gain than if he had purchased shares.

Long put
A trader who believes that a stock's price will decrease can buy the right to sell the stock at a fixed price (a put option). He will be under no obligation to sell the stock, but has the right to do so until the expiration date. If the stock price at expiration is below the exercise price by more than the premium paid, he will profit. If the stock price at expiration is above the exercise price, he will let the put contract expire worthless and only lose the premium paid.

Short call
A trader who believes that a stock price will decrease, can sell the stock short or instead sell, or "write," a call. The trader selling a call has an obligation to sell the stock to the call buyer at the buyer's option. If the stock price decreases, the short call position will make a profit in the amount of the premium. If the stock price increases over the exercise price by more than the amount of the premium, the short will lose money, with the potential loss unlimited.

Short put
A trader who believes that a stock price will increase can buy the stock or instead sell a put. The trader selling a put has an obligation to buy the stock from the put buyer at the put buyer's option. If the stock price at expiration is above the exercise price, the short put position will make a profit in the amount of the premium. If the stock price at expiration is below the exercise price by more than the amount of the premium, the trader will lose money, with the potential loss being up to the full value of the stock.

OTC MARKET
Options were originally traded in the over-the-counter (OTC) market, where the terms of the contract were customized or negotiated. The advantages of the OTC market over the exchange are that the option contracts could be tailored: strike prices, expiration dates, and the number of shares can be specified to meet the needs of the option buyer. However, the transaction costs of these options are greater and the liquidity is less. Option trading really took off when the first listed option exchangethe Chicago Board Options Exchange (CBOE)was organized in 1973 to trade standardized contracts, which greatly increased the market and liquidity of options. The CBOE was the largest

option exchange until 2003, when it was superseded in size by the electronic International Securities Exchange (ISE), based in New York. Most options sold in Europe are traded through electronic exchanges. Other exchanges for options in the United States include: American Stock Exchange LLC, (AMEX), the Pacific Exchange, Inc. (PCX), and the Philadelphia Stock Exchange, Inc. (PHLX). Options are traded just like stocksthe buyer buys at the ask price and the seller sells at the bid price. However, the option holder, unlike the holder of the underlying stock, has no voting rights in the corporation, and is not entitled to any dividends. Brokerage commissions, which are a little higher for options than for stocks, must also be paid to buy or sell options, and for the exercise and assignment of option contracts. Prices are usually quoted with a base plus per contract. To trade options, an investor must have a brokerage account and must be approved for trading options. They must also receive a copy of the booklet Characteristics and Risks of Standardized Options. Real World ExampleCommission Schedules for Buying and Selling Options Note that this is NOT a comparison of the different companies, but is simply a sample of how option trading is priced, and its actual cost. As of 10/20/2006: TD Ameritrade: $9.99 + $0.75 per contract for Internet options trades. Schwab: Same price; phone trades are $5 more, and broker-assisted trades are $25 more. OptionsXpress: $1.50 per contract with a minimum standard rate of $14.95. Also has numerous discounts for active traders. E*TRADE: Sliding commission scale which ranges from $6.99 + $0.75 per contract for traders making at least 1500 trades per quarter to $12.99 + $1.25 per contract for investors with less than $50,000 in assets, and making fewer than 30 trades per quarter. Charges $19.99 for exercise and assignments.

The Options Clearing Corporation (OCC) The Options Clearing Corporation (OCC) is jointly owned by the exchanges that trade options, and issues all listed options, and controls and effects all exercises and assignments. To provide a liquid market, the OCC guarantees all trades by acting as the other party to any purchase or sale of options. The OCC operates under the jurisdiction of both the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC). Under its SEC jurisdiction, OCC clears transactions for put and call options on common stocks and other equity issues, stock indexes, foreign currencies, interest rate composites and single-stock futures. As a registered Derivatives Clearing Organization (DCO) under CFTC jurisdiction, the OCC clears and settles transactions in futures and options on futures. The OCC's website, optionsclearing.com, hosts statistics and news on options, and publishes any notifications about changes in the trading rules, or the adjustment of certain option contracts because of a stock split or that were subjected to unusual circumstances, such as a merger of companies whose stock was the underlying security to the option contracts. The OCC, like other clearing companies, is the direct participant in every purchase and sale of an option contract. When an option writer or holder sells his contracts to someone else, the OCC serves as an intermediary in the transaction. The option writer sells his contract to the OCC and the option buyer buys it from the OCC.

The OCC issues, guarantees, and clears all option trades involving its member firms, which includes all U.S. option exchanges, and ensures that sales transactions follow all of the rules, and that the contract writer will perform. The Exercise of Options by Option Holders and the Assignment to Fulfill the Contract to Option Writers When an option holder wants to exercise his option, he must notify his broker of the exercise, and if it is the last trading day for the option, the broker must be notified before the exercise cut-off time, which will probably be earlier than on trading days before the last day, and the cut-off time may be different for different option classes or for index options. Although policies differ among brokerages, it is the duty of the option holder to notify his broker to exercise the option before the cut-off time. When the broker is notified, then the exercise instructions are sent to the OCC, which then assigns the exercise to one of its Clearing Members who are short in the same option

series as is being exercised. The Clearing Member will then assign the exercise to one of its customers who is short in the option. The customer is selected by a specific procedure, usually on a first-in, first-out basis, or some other fair procedure approved by the exchanges. Thus, there is no direct connection between an option writer and a buyer. To ensure contract performance, option writers are required to post margin, the amount depending on how much the option is in the money. If the margin is deemed insufficient, then the option writer will be subjected to a margin call. Option holders dont need to post margin because they will only exercise the option if it is in the money. Options, unlike stocks, cannot be bought on margin. Because the OCC is always a party to an option transaction, an option writer can close out his position by buying the same contract back, even while the contract buyer retains his position, because the OCC draws from a pool of contracts that have no connection to the original contract writer and buyer. Below is a diagram outlining the exercise and assignment of a call.

ExampleNo Direct Connection between Investors Who Write Options and those Who Buy Them John Call-Writer writes an option that legally obligates him to provide 100 shares of Microsoft for the price of $30 until April, 2007. The OCC buys the contract, adding it to the millions of other option contracts in its pool. Sarah Call-Buyer buys a contract that has the same terms that John Call-Writer wrotein other words, it belongs to the same option series. However, option contracts have no name on them. Sarah buys from the OCC, just as John sold to the OCC, and she just gets a contract giving her the right to buy 100 shares of Microsoft for $30 per share until April, 2007. Scenario 1Exercises of Options are Assigned According to Specific Procedures In February, the price of Microsoft rises to $35, and Sarah thinks it might go higher in the long run, but since March and April generally are not good times for most stocks, she decides to exercise her call to buy Microsoft stock at $30 per share to be able to hold the stock indefinitely. She instructs her broker to exercise her call; her broker forwards the instructions to the OCC, which then assigns the exercise to one of its participating members who provided the call for sale; the participating member, in turn, assigns it to an investor who wrote such a call; in this case, it happened to be John's brother, Sam CallWriter. John got lucky this time. Sam, unfortunately, either has to turn over his appreciated shares of Microsoft, or he'll have to buy them in the open market to provide them. This is the risk that an option writer has to takean option writer never knows when he'll be assigned an exercise, if the option is in the money. Scenario 2Closing Out an Option Position by Buying Back the Contract John Call-Writer decides that Microsoft might climb higher in the coming months, and so decides to close out his short position by buying a call contract with the same terms that he wrotethe same option series. Sarah, on the other hand, decides to maintain her long position by keeping her call contract until April. This can happen because there are no names on the option contracts. John closes his short position by buying the call back from the OCC at the current market price, which may be higher or lower than what he paid,

resulting in either a profit or a loss. Sarah can keep her contract because when she sells or exercises her contract, it will be with the OCC, not with John, and Sarah can be sure that the OCC will fulfill the terms of the contract if she should decide to exercise it later on. Thus, the OCC allows each investor to act independently of the other. When the assigned option writer must deliver stock, she can deliver stock already owned, buy it on the market for delivery, or ask her broker to go short on the stock and deliver the borrowed shares. However, finding borrowed shares to short may not always be possible, so this method may not be available to satisfy the option contract. If the assigned writer buys the stock in the market for delivery, the writer only needs the cash to pay for the difference between what the stock cost and the strike price of the call. Similarly, if the writer is using margin, then the margin requirements apply only to the difference between the purchase price and the strike price of the option. Full margin requirements, however, apply to shorted stock. An assigned put writer will need either the cash or the margin to buy the stock at the strike price, even if he intends to sell the stock immediately after the exercise of the put. When the call holder exercises, he can keep the stock or immediately sell it. However, he must have the margin, if he has a margin account, or cash, for a cash account, to pay for the stock, even if he sells it immediately. He can also use the delivered stock to cover a short in the stock. (Note: the reason for the
difference in equity requirements is because an assigned writer immediately receives the cash upon delivery of the shares, whereas a put writer or a call holder that purchased the shares may decide to keep the stock.)

ExampleFulfilling a Naked Call Exercise A call writer receives an exercise notice on 10 call contracts with a strike of $30 per share on XYZ stock on which she is still short. The stock currently trades at $35 per share. She does not own the stock, so she has to buy 1,000 shares of stock in the market for $35,000 and sell it for $30,000, resulting in an immediate loss of $5,000 minus the commission of buying the stock to fulfill her contract and minus the commission of an assignment.

Both exercise and assignment incur brokerage commissions for both holder and assigned writer. Generally, the commission is smaller to sell the option than it is to exercise it. However, there may be no choice if it is the last day of trading before expiration. Often, a writer will want to cover his short by buying it back on the open market. However, once he receives an assignment, then it is too late to cover his short position by closing the position with a purchase. Assignment is usually selected from writers who are still short at the end of the trading day. A possible assignment can be anticipated if a call is in the money at expiration, the option is trading at a discount, or the underlying stock is about to pay a large dividend. The OCC automatically exercises any option that is in the money by at least $0.50 (automatic exercise), unless notified by the broker not to. A customer may not want to exercise an option that is only slightly in the money if the transaction costs would be greater than the net from the exercise. In spite of the automatic exercise by the OCC, the option holder should notify his broker by the exercise cut-off time, which may be before the end of the trading day, of an intention to exercise. Exact procedures will depend on the broker. Any option that is sold on the last trading day before expiration would likely be bought by a market maker. Because a market makers transaction costs are lower than for retail customers, a market maker may exercise an option even if it is only a few cents in the money. Thus, any option writer who does not want to be assigned should close out his position before expiration day if there is any chance that it will be in the money even by a few pennies. Early Exercise Sometimes, an option will be exercised before its expiration daycalled early exercise, or premature exercise. Because options have a time value in addition to intrinsic value, most options are not exercised early. However, there is nothing to prevent someone from exercising an option, even if it is not profitable to do so, and sometimes it does occur,

which is why anyone who is short an option should expect the possibility of being assigned early. When an option is traded below parity (below its intrinsic value), then arbitrageurs can take advantage of the discount to profit from the difference, because their transaction cost are very low. An option with a high intrinsic value will have very little time value, and so, because of the difference between supply and demand in the market at any given moment, the option could be trading for less than its true worth. An arbitrageur will almost certainly take advantage of the price discrepancy for an instant profit. Anyone who is short an option with a high intrinsic value should expect a good possibility of being assigned an exercise. ExampleEarly Exercise by Arbitrageurs Profiting from an Option Discount XYZ stock is currently at $40 per share. Calls on the stock with a strike of $30 are selling for $9.80. This is a difference of $0.20 per share, enough of a difference for an arbitrageur, whose transaction costs are typically much lower than for a retail customer, to profit immediately by selling short the stock at $40 per share, then covering his short by exercising the call for a net of $0.20 per share minus the arbitrageurs small transaction costs. Option discounts will only occur when an option is deep in the money, because, otherwise, the time value would prevent any discount, unless the option is very close to expiration. Option Discounts Arising from an Imminent Dividend Payment on the Underlying Stock When a large dividend is paid by the underlying stock, its price drops on the ex-dividend date, resulting in a lower value for the calls. The stock price may remain lower after the payment, because the dividend payment lowers the assets of the company and therefore its worth. This causes many call holders to either exercise early to collect the dividend, or to sell the call before the drop in stock price. When many call holders sell at the same time, it causes the call to sell at a discount to the underlying, thereby creating

opportunities for arbitrageurs to profit from the price difference. However, there is some risk that the transaction will lose money, because the dividend payment and drop in stock price may not equal the premium paid for the call, even if the dividend is more than the time value of the call.

ExampleArbitrage Profit/Loss Scenario for a Dividend-Paying Stock XYZ stock is currently trading at $40 per share and is going to pay a dividend of $1 the next day. A call with a $30 strike is selling for $10.20, the $0.20 being the time value of the premium. So an arbitrageur decides to buy the call and exercise it to collect the dividend. Since the dividend is $1, but the time value is only $0.20, this could lead to a profit of $0.80 per share, but on the ex-dividend date, the stock drops to $39. Adding the $1 dividend to the share price yields $40, which is still less than buying the stock for $30 plus $10.20 for the call. It might be profitable if the stock does not drop as much on the ex-date or it recovers after the ex-date sufficiently to make it profitable. But this is a risk for the arbitrageur, and this transaction is, thus, known as risk arbitrage, because the profit is not guaranteed. 2005 Statistics for the Fate of Options The Options Clearing Corporation reported the following statistics for 2005:

All option writers who didn't close out their position earlier by buying an offsetting contract, made the maximum profitthe premiumon those contracts that expired. Option writers have lost at least something when the option is exercised, because the option holder wouldn't exercise it unless it was in the money. The more the exercised option was in the money, the greater the loss is for the assigned option writer and the greater the profits for the option holder. A closed out transaction could be at a profit or a loss for both holders and writers of options. A closed out transaction always yields at least some return of investment, because the investor would not close out his position unless he was getting something back.

Option strategies
An option strategy is implemented by combining one or more option positions and possibly an underlying stock position. Options are financial instruments that give the buyer the right to buy (for a call option) or sell (for a put option) the underlying security at some specific point of time in the future (European Option) or until some specific point of time in the future (American Option) for a price (strike price), which is fixed in advance (when the option is bought).

Calls increase in value as the underlying stock increases in value. Likewise puts increase in value as the underlying stock decreases in value. Buying both a call and a put means that if the underlying stock moves up the call increases in value and likewise if the underlying stock moves down the put increases in value. The combined position can increase in value if the stock moves significantly in either direction. (The position loses money if the stock stays at the same price or within a range of the price when the position was established.) This strategy is called a straddle. It is one of many options strategies that investors can employ. Options strategies can favor movements in the underlying stock that are bullish, bearish or neutral. In the case of neutral strategies, they can be further classified into those that are bullish on volatility and those that are bearish on volatility. The option positions used can be long and/or short positions in calls and/or puts at various strikes.

Bullish strategies
Bullish options strategies are employed when the options trader expects the underlying stock price to move upwards. It is necessary to assess how high the stock price can go and the time frame in which the rally will occur in order to select the optimum trading strategy. The most bullish of options trading strategies is the simple call buying strategy used by most novice options traders. Stocks seldom go up by leaps and bounds. Moderately bullish options traders usually set a target price for the bull run and utilize bull spreads to reduce cost. (It does not reduce risk because the options can still expire worthless.) While maximum profit is capped for these strategies, they usually cost less to employ for a given nominal amount of exposure. The bull call spread and the bull put spread are common examples of moderately bullish strategies. Mildly bullish trading strategies are options strategies that make money as long as the underlying stock price do not go down by the option's expiration date. These strategies

may provide a small downside protection as well. Writing out-of-the-money covered calls is a good example of such a strategy.

Bearish strategies
Bearish options strategies are the mirror image of bullish strategies. They are employed when the options trader expects the underlying stock price to move downwards. It is necessary to assess how low the stock price can go and the time frame in which the decline will happen in order to select the optimum trading strategy. The most bearish of options trading strategies is the simple put buying strategy utilised by most novice options traders. Stock prices only occasionally make steep downward moves. Moderately bearish options traders usually set a target price for the expected decline and utilise bear spreads to reduce cost. While maximum profit is capped for these strategies, they usually cost less to employ. The bear call spread and the bear put spread are common examples of moderately bearish strategies. Mildly bearish trading strategies are options strategies that make money as long as the underlying stock price does not go up by the options expiration date. These strategies may provide a small upside protection as well. .

Options spread
Options spreads are the basic building blocks of many options trading strategies. A spread position is entered by buying and selling equal number of options of the same class on the same underlying security but with different strike prices or expiration dates. The three main classes of spreads are the horizontal spread, the vertical spread and the diagonal spread. They are grouped by the relationships between the strike price and expiration dates of the options involved.

Vertical spreads, or money spreads, are spreads involving options of the same underlying security, same expiration month, but at different strike prices. Horizontal, calendar spreads, or time spreads are created using options of the same underlying security, same strike prices but with different expiration dates. Diagonal spreads are constructed using options of the same underlying security but different strike prices and expiration dates. They are called diagonal spreads because they are a combination of vertical and horizontal spreads.

Call and put spreads

Any spread that is constructed using calls can be referred to as a call spread, while a put spread is constructed using put options. Bull and bear spreads If a spread is designed to profit from a rise in the price of the underlying security, it is a bull spread. A bear spread is a spread where favorable outcome is obtained when the price of the underlying security goes down. Credit and debit spreads If the premiums of the options sold is higher than the premiums of the options purchased, then a net credit is received when entering the spread. If the opposite is true, then a debit is taken. Spreads that are entered on a debit are known as debit spreads while those entered on a credit are known as credit spreads. Ratio spreads and backspreads There are also spreads in which unequal number of options are simultaneously purchased and written. When more options are written than purchased, it is a ratio spread. When more options are purchased than written, it is a backspread.

Spread combinations Many options strategies are built around spreads and combinations of spreads. For example, a bull put spread is basically a bull spread that is also a credit spread while the iron butterfly can be broken down into a combination of a bull put spread and a bear call spread. Box spread A box spread consists of a bull call spread and a bear put spread. The calls and puts have the same expiration date. The resulting portfolio is delta neutral. For example, a 40-50 January 2007 box consists of:

Long a January 2007 40-strike call Short a January 2007 50-strike call Long a January 2007 50-strike put Short a January 2007 40-strike put

A box spread position has a constant payoff at exercise equal to the difference in strike values. Thus, the 40-50 box example above is worth 10 at exercise. For this reason, a box is sometimes considered a "pure interest rate play" because buying one basically constitutes loaning some money to the counterparty until exercise.

Covered Call
The simplest option strategy is the covered call, which simply involves writing a call for stock already owned. If the call is unexercised, then the call writer keeps the premium, and still has the stock, for which he can still receive any dividends. If the call is exercised, then the call writer gets the exercise price for his stock in addition to the premium, but he foregoes the stock profit above the strike price. ExampleCovered Call

On October 6, 2006, you own 1,000 shares of Microsoft stock, which is currently trading at $27.87 per share. You write 10 call contracts for Microsoft with a strike price of $30 per share that expire in January, 2007. You receive .35 per share for your calls, which equals $35.00 per contract for a total of $350.00. If Microsoft doesnt rise above $30, you get to keep the premium as well as the stock. If Microsoft is above $30 per share at expiration, then you still get $30,000 for your stock, and you still get to keep the $350 premium.

Protective Put A stockholder buys protective puts for stock already owned to protect his position by minimizing any loss. If the stock rises, then the put expires worthless, but the stockholder benefits from the rise in the stock price. If the stock price drops below the strike price of the put, then the puts value increases 1 dollar for each dollar drop in the stock price. Thus, the put compensates dollar for dollar the drop in stock price below the strike price. The net payoff for the protective put position is the value of the stock and the put, minus the premium paid for the put.

ExampleProtective Put Using the same example above for the covered call, you instead buy 10 put contracts at $0.25 per share, or $25.00 per contract for a total of $250 for the 10 puts with a strike of $25 that expires in January, 2007. If Microsoft drops to $20 a share, your puts are worth $5,000 and your stock is worth $20,000 for a total of $25,000. No matter how far Microsoft drops, the value of your puts will increase proportionately, so your position will not be worth less than $25,000 before the expiration of the putsthus, the puts protect your position. Collar A collar is the use of a protective put and covered call to delimit the value of a security position between 2 bounds. A protective put is bought to protect the lower bound, while a call is sold at a strike price for the upper bound, which helps pay for the protective put. This position limits an investors potential loss, but allows a reasonable

profit. However, as with the covered call, the upside potential is limited to the strike price of the written call.

ExampleCollar On October 6, 2006, you own 1,000 shares of Microsoft stock, which is currently trading at $27.87 per share. You want to hang onto the stock until next year to delay paying taxes on your profit, and to pay only the lower long-term capital gains tax. To protect your position, you buy 10 protective puts with a strike price of $25 that expires in January, 2007, and sell 10 calls with a strike price of $30 that also expires in January, 2007. You get $350.00 for the 10 call contracts, and you pay $250 for the 10 put contracts for a net of $100. If Microsoft rises above $30 per share, then you get $30,000 for your 1,000 shares of Microsoft. If Microsoft should drop to $23 per share, then your Microsoft stock is worth $23,000, and your puts are worth a total of $2,000. If Microsoft drops further, then the puts become more valuableincreasing in value in direct proportion to the drop in the stock price below the strike. Thus, the most youll get is $30,000 for your stock, but the least value of your position will be $25,000. Thus, your position is collared at $25,000 below and $30,000 above. Note, however, that your risk is that the written calls might be exercised before the end of the year, thus forcing you, anyway, to pay shortterm capital gains taxes in 2007 instead of long-term capital gains taxes in 2008.

Straddle A long straddle is established by buying both a put and call on the same security at the same strike price and with the same expiration. This investment strategy is profitable if the stock moves substantially up or down, and is often done in anticipation of a big movement in the stock price, but without knowing which way it will go. For instance, if an important court case is going to be decided soon that will have a substantial impact on the stock price, but whether it will favor or hurt the company is not known beforehand, then the straddle would be a good investment strategy. The greatest loss for the straddle is the premium paid for the put and call, which will expire worthless if the stock price doesnt move enough. One buys a straddle because he expects the stock price to move substantially before the expiration of the options. The buyer can only profit if the value of either the call or the put is greater than the cost of the premium of both, the put and the call.

A short straddle is created when one writes both a put and a call with the same strike price and expiration date, which one would do if she believes that the stock will not move much before the expiration of the options. If the stock price remains flat, then both options expire worthless, allowing the straddle writer to keep both premiums.

A strap is a specific option contract consisting of 1 put and 2 calls for the same stock, strike price, and expiration date. A strip is a contract for 2 puts and 1 call for the same stock. Because strips and straps are 1 contract for 3 options, they are also called triple options, and the premiums are less then if each option were purchased individually. ExampleLong Straddle and Short Straddle Merck is embroiled in potentially thousands of lawsuits concerning VIOXX, which was withdrawn from the market. On October, 31, 2006, Mercks stock was trading at $45.29, near its 52-week high. Merck has been winning and losing the lawsuits. If the trend goes one way or the other in a definite direction, it could have a major impact on the stock price, and you think it might happen before 2008, so you buy 10 puts and 10 calls that expire in January, 2008. You pay $2.30 per share for the calls, for a total of $2,300 for 10 contracts. You pay $1.75 per share for the puts, for a total of $1,750 for the 10 put

contracts. Your total cost is $4,050 plus commissions. On the other hand, your sister, Sally, decides to write the straddle, receiving the total premium of $4,050 minus commissions. Lets say, that, by expiration, Merck is clearly losing; its stock price drops to $30 per share. Your calls expire worthless, but your puts are now in the money by $10 per share, for a net value of $10,000. Therefore, your total profit is almost $6,000 after subtracting the premiums for the options and the commissions to buy them, as well as the exercise commission to exercise your puts. Your sister, Sally, has lost that much. She buys the 1,000 shares of Merck for $40 per share as per the put contracts that she sold, but the stock is only worth $30 per share, for a net $30,000. Her loss of $10,000 is offset by the $4,050 premiums that she received for writing the straddle. Your gain is her loss. (Actually, she lost a little more than you gained, because commissions have to be subtracted from your gains and added to her losses.) A similar scenario would occur if Merck wins, and the stock rises to $60 per share. However, if, by expiration, the stock is less than $50 and more than $40, then all of your options expire worthless, and you lose the entire $4,050 plus the commissions to buy those options. For you to make any money, the stock would either have to fall a little below $36 per share or rise a little above $54 per share to compensate you for the premiums for both the calls and the puts and the commission to buy them and exercise them. Spread A spread is established by buying or selling various combinations of calls and puts, at different strike prices and/or different expiration dates on the same underlying security. There are many possibilities of spreads, but they can be classified based on a few parameters. A credit spread results from buying a long position that costs

less than the premium received selling the short position of the spread; a debit spread results when the long position costs more than the premium received for the short position. A money spread, or vertical spread, involves the buying of options and the writing of other options with different strike prices, but with the same expiration dates. A time spread, or calendar spread, involves buying and writing options with different expiration dates. A horizontal spread is a time spread with the same strike prices. A diagonal spread has different strike prices and different expiration dates. A bullish spread increases in value as the stock price increases, whereas a bearish spread increases in value as the stock price decreases. In general, the writing of options helps to purchase long option positions. Example Bullish Money Spread On October 6, 2006, you buy, for $850, 10 calls for Microsoft, with a strike price of $30 that expires in April, 2007, and you write 10 calls for Microsoft with a strike price of $32.50 that expires in April, 2007, for which you receive $200. At expiration, if the stock price stays below $30 per share, then both calls expire worthless, which results in a net loss, excluding commissions, of $650 ($850 paid for long calls - $200 received for written short calls). If the stock rises to $32.50, then the 10 calls that you purchased are worth $2,500, and your written calls expire worthless. This results in a net $1,850 ($2,500 long call value + $200 premium for short call - $850 premium for the long call). If the price of Microsoft rises above $32.50, then you exercise your long call to cover your short call, netting you the difference of $2,500 plus the premium of your short call minus the premium of your long call minus commissions.

Straddle
In finance, a straddle is an investment strategy involving the purchase or sale of particular option derivatives that allows the holder to profit based on how much the price

of the underlying security moves, regardless of the direction of price movement. The purchase of particular option derivatives is known as a long straddle, while the sale of the option derivatives is known as a short straddle.

Long straddle
An option payoff diagram for a long straddle position A long straddle involves going long, i.e., purchasing, both a call option and a put option on some stock, interest rate, index or other underlying. The two options are bought at the same strike price and expire at the same time. The owner of a long straddle makes a profit if the underlying price moves a long way from the strike price, either above or below. Thus, an investor may take a long straddle position if he thinks the market is highly volatile, but does not know in which direction it is going to move. This position is a limited risk, since the most a purchaser may lose is the cost of both options. At the same time, there is unlimited profit potential.[1] For example, company XYZ is set to release its quarterly financial results in two weeks. A trader believes that the release of these results will cause a large movement in the price of XYZ's stock, but does not know whether the price will go up or down. He can enter into a long straddle, where he gets a profit no matter which way the price of XYZ stock moves, if the price changes enough either way. If the price goes up enough, he uses the call option and ignores the put option. If the price goes down, he uses the put option and ignores the call option. If the price does not change enough, he loses money, up to the total amount paid for the two options.

Short straddle
An option payoff diagram for a short straddle position A short straddle is a non-directional options trading strategy that involves simultaneously selling a put and a call of the same underlying security, strike price and expiration date. The profit is limited to the premiums of the put and call, but it is risky if the underlying security's price goes up or down much. The deal breaks even if the intrinsic value of the put or the call equals the sum of the premiums of the put and call. This strategy is called "nondirectional" because the short straddle profits when the underlying security changes little in price before the expiration of the straddle. The short straddle can also be classified as a credit spread because the sale of the short straddle results in a credit of the premiums of the put and call. A short straddle position is highly risky, because the potential loss is unlimited, whereas profitability is limited to the premium gained by the initial sale of the options. The Collar is a more conservative "opposite" that limits gains and losses.

Strangle
In finance, a strangle is an investment strategy involving the purchase or sale of particular option derivatives that allows the holder to profit based on how much the price of the underlying security moves, with relatively minimal exposure to the direction of price movement. The purchase of particular option derivatives is known as a long strangle, while the sale of the option derivatives is known as a short strangle. It is related to a similar option strategy known as a straddle

Long strangle
The long strangle involves going long (buying) both a call option and a put option of the same underlying security. Like a long straddle, the options expire at the same time, but unlike a straddle, the options have different strike prices. The owner of a long strangle makes a profit if the underlying price moves far enough way from the current price, either

above or below. Thus, an investor may take a long strangle position if he thinks the underlying security is highly volatile, but does not know which direction it is going to move. This position is a limited risk, since the most a purchaser may lose is the cost of both options. At the same time, there is unlimited profit potential.[1]

Short strangle
The short strangle is the converse of the long strangle. The call and put options are written (sold) instead of bought. The investor loses if the underlying security increases or decreases enough; but if the stock price remains stable then the options expire and the investor gets to keep the premiums. The difference between a straddle and a strangle is the strike price of the options. In a straddle, the options are bought with the same strike price; in a strangle, the options are bought with different strike prices.

Butterfly
In options trading, a long butterfly (sometimes simply butterfly) is a combination trade resulting in the following net position:

Long 1 call at (X a) strike Short 2 calls at X strike Long 1 call at (X + a) strike

all with the same expiration date. At expiration the position will be worth zero if the underlying is below Xa or above X+a, and will be worth a positive amount between these two values. The payoff function is shaped like an upside-down V, and the maximum payoff occurs at X (see diagram). Since the payoff is sometimes zero, sometimes positive, the price of a butterfly is always non-negative (to avoid an arbitrage opportunity). A butterfly can also be created as follows:

Long 1 put at (X a) strike Short 2 puts at X strike Long 1 put at (X + a) strike

and this is equivalent to the call version (as can be verified via putcall parity). The double position in the middle is called the body, while the two other positions are called the wings. A related strategy where the middle two positions have differing strike values is known as an Iron condor. In an unbalanced butterfly the variable a can have 2 different values.

Long butterfly
The butterfly spread is a neutral options trading strategy that is a combination of a bull spread and a bear spread. It is a limited profit, limited risk options strategy. There are 3 striking prices involved in a butterfly spread and it can be constructed using calls or puts. Long butterflies are entered when the investor thinks that the underlying stock will not rise or fall much by expiration (i.e. when the investor is bearish on volatility). Using calls, the long butterfly can be constructed by buying one lower striking in-the-money call, writing two at-the-money calls and buying another higher striking out-of-the-money call. A resulting net debit is taken to enter the trade, hence it is also a debit spread.

A long butterfly spread can also be constructed using puts and is known as a long put butterfly. The long put butterfly spread is a neutral options trading strategy that is a combination of a bull put spread and a bear put spread. It is a limited profit, limited risk options trading strategy that is taken when the options trader thinks that the underlying stock will not rise or fall much by expiration. There are 3 striking prices involved in a long put butterfly spread and it is constructed by buying one lower striking put, writing two at-the-money puts and buying another higher striking put for a net debit.

Short butterfly
Short butterfly is the name of a neutral-outlook, options trading strategy that involves trading options at three different strike prices. The short butterfly is a neutral strategy like the long butterfly spread but bullish on volatility. It is a limited profit, limited risk options trading strategy and it can be constructed using calls or puts. Using calls, the short butterfly can be constructed by writing one lower striking call, buying two at-the-money calls and writing another higher striking call. A net credit is received upon entering this spread. Hence, the short butterfly is also a credit spread.

Valuation models
The value of an option can be estimated using a variety of quantitative techniques based on the concept of risk neutral pricing and using stochastic calculus. The most basic model is the Black-Scholes model. More sophisticated models are used to model the volatility smile. These models are implemented using a variety of numerical techniques. In general, standard option valuation models depend on the following factors:

The current market price of the underlying security, the strike price of the option, particularly in relation to the current market price of the underlier (in the money vs. out of the money), the cost of holding a position in the underlying security, including interest and dividends,

the time to expiration together with any restrictions on when exercise may occur, and an estimate of the future volatility of the underlying security's price over the life of the option.

More advanced models can require additional factors, such as an estimate of how volatility changes over time and for various underlying price levels, or the dynamics of stochastic interest rates. The following are some of the principal valuation techniques used in practice to evaluate option contracts.

Black Scholes
In the early 1970s, Fischer Black and Myron Scholes made a major breakthrough by deriving a differential equation that must be satisfied by the price of any derivative dependent on a non-dividend-paying stock. By employing the technique of constructing a risk neutral portfolio that replicates the returns of holding an option, Black and Scholes produced a closed-form solution for a European option's theoretical price.At the same time, the model generates hedge parameters necessary for effective risk management of option holdings. While the ideas behind Black-Scholes were ground-breaking and eventually led to a Nobel Prize in Economics for Myron Scholes and Robert Merton , the application of the model in actual options trading is clumsy because of the assumptions of continuous (or no) dividend payment, constant volatility, and a constant interest rate. Nevertheless, the Black-Scholes model is still one of the most important methods and foundations for the existing financial market in which the result is within the reasonable range.

Stochastic volatility models

Since the market crash of 1987, it has been observed that market implied volatility for options of lower strike prices are typically higher than for higher strike prices, suggesting

that volatility is stochastic, varying both for time and for the price level of the underlying security. Stochastic volatility models have been developed including one developed by S.L. Heston.One principal advantage of the Heston model is that it can be solved in closed-form, while other stochastic volatility models require complex numerical methods. Model implementation Once a valuation model has been chosen, there are a number of different techniques used to take the mathematical models to implement the models. Analytic techniques In some cases, one can take the mathematical model and using analytic methods develop closed form solutions. The resulting solutions are useful because they are rapid to calculate.

Binomial tree pricing model

Closely following the derivation of Black and Scholes, John Cox, Stephen Ross and Mark Rubinstein developed the original version of the binomial options pricing model. It models the dynamics of the option's theoretical value for discrete time intervals over the option's duration. The model starts with a binomial tree of discrete future possible underlying stock prices. By constructing a riskless portfolio of an option and stock (as in the Black-Scholes model) a simple formula can be used to find the option price at each node in the tree. This value can approximate the theoretical value produced by Black Scholes, to the desired degree of precision. However, the binomial model is considered more accurate than Black-Scholes because it is more flexible, e.g. discrete future dividend payments can be modeled correctly at the proper forward time steps, and American options can be modeled as well as European ones. Binomial models are widely used by professional option traders.

Monte Carlo model

For many classes of options, traditional valuation techniques are intractable due to the complexity of the instrument. In these cases, a Monte Carlo approach may often be useful. Rather than attempt to solve the differential equations of motion that describe the option's value in relation to the underlying security's price, a Monte Carlo model determines the value of the option for a set of randomly generated economic scenarios. The resulting sample set yields an expectation value for the option. Finite difference models The equations used to value options can often be expressed in terms of partial differential equations, and once expressed in this form, a finite difference model can be derived. Other models Other numerical implementations which have been used to value options include finite element methods.

Risks
As with all securities, trading options entails the risk of the option's value changing over time. However, unlike traditional securities, the return from holding an option varies nonlinearly with the value of the underlier and other factors. Therefore, the risks associated with holding options are more complicated to understand and predict. In general, the change in the value of an option can be derived from Ito's lemma as: where the greeks , , and are the standard hedge parameters calculated from an option valuation model, such as Black-Scholes, and dS, d and dt are unit changes in the underlier price, the underlier volatility and time, respectively. Thus, at any point in time, one can estimate the risk inherent in holding an option by calculating its hedge parameters and then estimating the expected change in the model

inputs, dS, d and dt, provided the changes in these values are small. This technique can be used effectively to understand and manage the risks associated with standard options. For instance, by offsetting a holding in an option with the quantity of shares in the underlier, a trader can form a delta neutral portfolio that is hedged from loss for small changes in the underlier price. The corresponding price sensitivity formula for this portfolio is: Example A call option expiring in 99 days on 100 shares of XYZ stock is struck at $50, with XYZ currently trading at $48. With future realized volatility over the life of the option estimated at 25%, the theoretical value of the option is $1.89. The hedge parameters , , , are (0.439, 0.0631, 9.6, and -0.022), respectively. Assume that on the following day, XYZ stock rises to $48.5 and volatility falls to 23.5%. We can calculate the estimated value of the call option by applying the hedge parameters to the new model inputs as: Under this scenario, the value of the option increases by $0.0614 to $1.9514, realizing a profit of $6.14. Note that for a delta neutral portfolio, where by the trader had also sold 44 shares of XYZ stock as a hedge, the net loss under the same scenario would be ($15.81). Pin risk Main article: Pin risk A special situation called pin risk can arise when the underlier closes at or very close to the option's strike value on the last day the option is traded prior to expiration. The option writer (seller) may not know with certainty whether or not the option will actually be exercised or be allowed to expire worthless. Therefore, the option writer may end up with a large, unwanted residual position in the underlier when the markets open on the next trading day after expiration, regardless of their best efforts to avoid such a residual.

Counterparty risk A further, often ignored, risk in derivatives such as options is counterparty risk. In an option contract this risk is that the seller won't sell or buy the underlying asset as agreed. The risk can be minimized by using a financially strong intermediary able to make good on the trade, but in a major panic or crash the number of defaults can overwhelm even the strongest intermediaries.

Historical uses of options

Contracts similar to options are believed to have been used since ancient times. In the real estate market, call options have long been used to assemble large parcels of land from separate owners, e.g. a developer pays for the right to buy several adjacent plots, but is not obligated to buy these plots and might not unless he can buy all the plots in the entire parcel. Film or theatrical producers often buy the right but not the obligation to dramatize a specific book or script. Lines of credit give the potential borrower the right but not the obligation to borrow within a specified time period. Many choices, or embedded options, have traditionally been included in bond contracts. For example many bonds are convertible into common stock at the buyer's option, or may be called (bought back) at specified prices at the issuer's option. Mortgage borrowers have long had the option to repay the loan early, which corresponds to a callable bond option. In London, puts and "refusals" (calls) first became well-known trading instruments in the 1690s during the reign of William and Mary. Privileges were options sold over the counter in nineteenth century America, with both puts and calls on shares offered by specialized dealers. Their exercise price was fixed at a rounded-off market price on the day or week that the option was bought, and the expiry

date was generally three months after purchase. They were not traded in secondary markets.

Vanilla Vs. Exotic Options

A "Vanilla Option" is an informal term used to refer a standard Option on any financial instrument.[16] The "vanilla" or "plain vanilla" term is attached infront of a Option to indicate that it is a simple and standard Option with terms like Strike price and Expiry, and has no complex structure. As Options may get very complex with custom features, this term helps distinguish simple option from a complex option. On the contrary, complex option is referred to as "Exotic Option". You can use "Exotic" term to refer to OTC Options. Otherwise there are no clear rules defined to distinguish these two.

Option style
In finance, the style or family of an option is a general term denoting the class into which the option falls, usually defined by the dates on which the option may be exercised. The vast majority of options are either European or American (style) options. These options - as well as others where the payoff is calculated similarly - are referred to as "vanilla options". Options where the payoff is calculated differently are categorized as "exotic options". Exotic options can pose challenging problems in valuation and hedging.

American and European options

The key difference between American and European options relates to when the options can be exercised:

A European option may be exercised only at the expiry date of the option, i.e. at a single pre-defined point in time. An American option on the other hand may be exercised at any time before the expiry date.

For both, the pay-off - when it occurs - is via: Max [ (S K), 0 ], for a call option Max [ (K S), 0 ], for a put option: (Where K is the Strike price and S is the spot price of the underlying asset) Option contracts traded on futures exchanges are mainly American-style, whereas those traded over-the-counter are mainly European. [edit] Difference in value European options are typically valued using the Black-Scholes or Black model formula. This is a simple equation with a closed-form solution that has become standard in the financial community. There are no general formulae for American options, but a choice of models to approximate the price are available (for example Whaley, binomial options model, and others - there is no consensus on which is preferable) [1]. Recently, a semiclosed exact formula for the price of American puts has been published by Song-Ping Zhu[2]. There is some debate over whether this formula is a tractable analytic solution or whether it defines the basis for a genre of numerical methods of solving the problem.[citation
needed]

American options are rarely exercised early. This is because any option has a nonnegative time value and is usually worth more unexercised. Owners who wish to realise the full value of their option will mostly prefer to sell it on, rather than exercise it immediately, sacrificing the time value.[3] Where an American and a European option are otherwise identical (having the same strike price, etc.), the American option will be worth at least as much as the European (which it entails). If it is worth more, then the difference is a guide to the likelihood of early exercise. In practice, one can calculate the Black-Scholes price of a European option that is equivalent to the American option (except for the exercise dates of course).

The difference between the two prices can then be used to calibrate the more complex American option model. To account for the American's higher value there must be some situations in which it is optimal to exercise the American option before the expiration date. This can arise in several ways, such as:

An in the money (ITM) call option on a stock is often exercised just before the stock pays a dividend which would lower its value by more than the option's remaining time value

A deep ITM currency option (FX option) where the strike currency has a lower interest rate than the currency to be received will often be exercised early because the time value sacrificed is less valuable than the expected depreciation of the received currency against the strike.

An American bond option on the dirty price of a bond (such as some convertible bonds) may be exercised immediately if ITM and a coupon is due.

A put option on gold will be exercised early when deep ITM, because gold tends to hold its value whereas the currency used as the strike is often expected to lose value through inflation if the holder waits until final maturity to exercise the option (they will almost certainly exercise a contract deep ITM, minimizing its time value).

Non-Vanilla Exercise Rights

There are other, more unusual exercise styles in which the pay-off value remains the same as a standard option (as in the classic American and European options above) but where early exercise occurs differently:

A Bermudan option is an option where the buyer has the right to exercise at a set (always discretely spaced) number of times. This is intermediate between a European option--which allows exercise at a single time, namely expiry--and an

American option, which allows exercise at any time (the name is a pun: Bermuda is between America and Europe). For example a typical Bermudan swaption might confer the opportunity to enter into an interest rate swap. The option holder might decide to enter into the swap at the first exercise date (and so enter into, say, a ten-year swap) or defer and have the opportunity to enter in six months time (and so enter a nine-year and six-month swap). Most exotic interest rate options are of Bermudan style.

A Canary option is an option whose exercise style lies somewhere between European options and Bermudan options. (The name is a pun on the relative geography of the Canary Islands.) Typically, the holder can exercise the option at quarterly dates, but not before a set time period (typically one year) has elapsed. The term was coined by Keith Kline, who at the time was an agency fixed income trader at the Bank of New York.

A capped-style option is not an interest rate cap but a conventional option with a pre-defined profit cap written into the contract. A capped-style option is automatically exercised when the underlying security closes at a price making the option's mark to market match the specified amount.

A compound option is an option on another option, and as such presents the holder with two separate exercise dates and decisions. If the first exercise date arrives and the 'inner' option's market price is below the agreed strike the first option will be exercised (European style), giving the holder a further option at final maturity.

A shout option allows the holder effectively two exercise dates: during the life of the option they can (at any time) "shout" to the seller that they are locking-in the current price, and if this gives them a better deal than the pay-off at maturity they'll use the underlying price on the shout date rather than the price at maturity to calculate their final pay-off.

A swing option gives the purchaser the right to exercise one and only one call or put on any one of a number of specified exercise dates (this latter aspect is Bermudan). Penalties are imposed on the buyer if the net volume purchased exceeds or falls below specified upper and lower limits. Allows the buyer to "swing" the price of the underlying asset. Primarily used in energy trading.

"Exotic" Options with Standard Exercise Styles

These options can be exercised either European style or American style; they differ from the plain vanilla option only in the calculation of their pay-off value:

A cross option (or composite option) is an option on some underlying in one currency with a strike denominated in another currency. For example a standard call option on IBM, which is denominated in dollars pays $MAX(S-K,0) (where S is the stock price at maturity and K is the strike). A composite stock option might pay MAX(S/Q-K,0), where Q is the prevailing FX rate. The pricing of such options naturally needs to take into account FX volatility and the correlation between the exchange rate of the two currencies involved and the underlying stock price.

A quanto option is a cross option in which the exchange rate is fixed at the outset of the trade, typically at 1. The payoff of an IBM quanto call option would then be max(S-K,0).

An exchange option is the right to exchange one asset for another (such as a sugar future for a corporate bond).

A basket option is an option on the weighted average of several underlyings A rainbow option is a basket option where the weightings depend on the final performances of the components. A common special case is an option on the worst-performing of several stocks.

Non-vanilla path dependent "exotic" options

The following "exotic options" are still options, but have payoffs calculated quite differently from those above. Although these instruments are far more unusual they can also vary in exercise style (at least theoretically) between European and American:

A lookback option is a path dependent option where the option owner has the right to buy (sell) the underlying instrument at its lowest (highest) price over some preceding period.

An Asian option (or Average option) is an option where the payoff is not determined by the underlying price at maturity but by the average underlying price over some pre-set period of time. For example an Asian call option might pay MAX(DAILY_AVERAGE_OVER_LAST_THREE_MONTHS(S) - K, 0). Asian options were originated in Asian markets to prevent option traders from attempting to manipulate the price of the underlying security on the exercise date.
[citation needed]

A Russian option is a lookback option which runs for perpetuity. That is, there is no end to the period into which the owner can look back.

A game option or Israeli option is an option where the writer has the opportunity to cancel the option he has offered, but must pay the payoff at that point plus a penalty fee.

The payoff of a Cumulative Parisian option is dependent on the total amount of time the underlying asset value has spent above or below a strike price.

The payoff of a Standard Parisian option is dependent on the maximum amount of time the underlying asset value has spent consecutively above or below a strike price.

A barrier option involves a mechanism where if a 'limit price' is crossed by the underlying, the option either can be exercised or can no longer be exercised.

A double barrier option involves a mechanism where if either of two 'limit prices' is crossed by the underlying, the option either can be exercised or can no longer be exercised.

A Cumulative Parisian barrier option involves a mechanism where if the total amount of time the underlying asset value has spent above or below a 'limit price', the option can be exercised or can no longer be exercised.

A Standard Parisian barrier option involves a mechanism where if the maximum amount of time the underlying asset value has spent consecutively above or below a 'limit price', the option can be exercised or can no longer be exercised.

A reoption occurs when a contract has expired without having been exercised. The owner of the underlying security may then reoption the security. The term and strike price of the new option may be the same as or different from the original option.

A binary option (also known as a digital option) pays a fixed amount, or nothing at all, depending on the price of the underlying instrument at maturity.

A chooser option gives the purchaser a fixed period of time to decide whether the derivative will be a vanilla call or put.

A forward start option is an option whose strike price is determined in the future A cliquet option is a sequence of forward start options

Marketing
This marketing strategy is sometimes categorized as "safe" or "conservative" and even "hedging risk" as it provides high income and its flaws are well known since 1975 when

Fischer Black published his theory in "Fact and Fantasy in the Use of Options. According to Reilly and Brown (2003); "to be profitable, the covered call strategy requires that the investor guess correctly that share values will remain in a reasonably narrow band around their present levels." (p. 995) In recent years, the interest in covered call strategies has been enhanced by two developments according to the article Buy Writing Makes Comeback as Way to Hedge Risk. Pensions & Investments, (May 16, 2005): (1) in 2002 the Chicago Board Options Exchange introduced the first major benchmark index for covered call strategies, the CBOE S&P 500 BuyWrite Index (ticker BXM), and (2) in 2004 the Ibbotson Associatesconsulting firm published a case study on buy-write strategies. After mid2004, there was introduction of many new covered call investment products. Even though there is limited upside and the premium is subtracted, covered calls do not suffer loss as there is complete risk of loss. Selling a naked put is similar to covered calls. Option beginners and many brokerages always categorize naked put as risky. However, a common short put strategy allowed by many firms as a suitable transaction to beginning option traders is a cash covered put.

CHAPTER 2 REVIEW OF LITERATURE

Arbitrage Tests of Israels Currency Options Markets by
Samer HajYehia (MIT) This paper focuses on the Israeli currency options market, which includes currency options traded on the Tel Aviv Stock Exchange and (non-tradable) Bank of Israel currency options. The three aims of this study are: (a) To examine the null hypothesis that the Israeli currency options market is efficient, an issue that has notyet been thoroughly investigated. Ex-post tests of arbitrage and dominance conditions do not permit rejection of the null hypothesis, except for very-near maturity, deep-in-the-money (ITM) options. (b) To test the validity of the Black and Scholes (B-S) model as a native option-pricing model for the case of an exchange-rate target zone. We find that although we cannot reject the weakly efficient market hypothesis (except for very-near-maturity deep-ITM options), we can reject the strongly efficient market and/or the B-S model validity hypotheses. The banking sector could have utilized arbitrage opportunities, notably for out-of themoney, at-the-money, and far-from-maturity options, especially when employing inter-temporal weighted-average implied standard deviation. (c) To address the issue of the liquidity premium evaluation; this (rather surprisingly) is found to be negative for some options. This study extends previous studies of options by examining the efficiency of currency option markets and the validity of the Black and Scholes model under a target zone exchange rate regime. It also compares the performance of currency option trading on the exchange and over-the-counter for the same period.

http://pluto.huji.ac.il/~msfalkin/pdfs/99-01.pdf

Risk-Neutralized At-the-Money Consistent Historical Distributions in Currency Options Pricing

Nusret Cakici and Kevin R. Foster City College of New York email: ncakici@yahoo.com, kfoster@ccny.cuny.edu June 2001 forthcoming in issue 6(1) of the Journal of Computational Finance The comments of an anonymous referee are gratefully acknowledged. Remaining errors are our own. Financial support from the Schweger fund is gratefully acknowledged. Currency Options Pricing This paper demonstrates the usefulness of risk-neutralized at-the- money consistent historical distributions in estimating currency option prices that exhibit a volatility smile and replicate the term structure of volatility. Implied volatility smiles are constructed for the British pound ,Japanese yen, and Deutsche Mark (euro) for the period 1980-2000. Since these smiles are constructed only from historical data on the underlying asset, not option prices, market implied volatilities may be compared to the estimates from the historical distribution in order to measure the relative richness or cheapness of quoted options. Prior models of currency price evolution embodying restrictive assumptions about the functional form of the errors are not necessary. Since currency prices are leptokurtotic, a kernel estimation procedure of the historical distribution is introduced to properly account for the effects of outliers. http://www.ccny.cuny.edu/social_science/Kfoster/research/Cakici_Foster_currency_RN HD.pdf

THE by

VOLATILITY

RISK

PREMIMUM

EMBEDDED

IN

CURRENCY OPTIONS
Buen Sin Low and Shaojum Zhang Division of Banking and Finance, Nanyang Technological University, Singapore This study employs a non-parametric approach to investigate the volatility risk premimum in over the-counter currency option market . Using a large database of daily quotes on delta netural straddle in four major currencies- the British Pound, the Euro, the Japanese Yen, and the Swiss Franc- we find that volatility risk is priced in all four currencies across different option maturities and the volatility risk premimum is negative . The volatility risk premimum has a term structure where the premimum decrease in maturity . http://www.ims.nus.edu.sg/activities/wkcf/files/bslow1.pdf

Pricing Foreign Currency and Cross-Currency Options under GARCH

by Jin-Chuan Duan Department of Finance Hong Kong University of Science and Technology Clear Water Bay, Kowloon Hong Kong E-mail: jcduan@usthk.ust.hk Jason Z. Wei Faculty of Management University of Toronto 105 St. George Street

Canada, Ontario, Canada E-mail: wei@mgmt.utoronto.ca

Pricing Foreign Currency and Cross-Currency Options Under GARCH

The main objective of this paper is to propose an alternative valuation framework for pricing foreign currency and cross-currency options, which is capable of accommodating existing empirical regularities. The paper generalizes the GARCH option pricing methodology of Duan (1995) to a two country setting. Specifically, we assume a bivariate nonlinear GARCH system for the exchange rate and the foreign asset price, and generalize the local risk-neutral valuation principle for pricing derivatives. We define an equilibrium price measure in the two-country economy and derive the locally riskneutralized GARCH processes for the exchange rate and the foreign asset price. Foreign currency options and cross-currency options are then valued using Monte Carlo simulations. Our setup accommodates rich empirical regularities such as stochastic volatility, fat tailed distributions and leverage effect extensively documented for financial data series. Numerical results show that our proposed model exhibits properties that are consistent with the documented empirical regularities for foreign currency options and quanto options. http://www.smartquant.com/references/TimeSeries/ts3.pdf

CHAPTER 3 RESEARCH METHODOLOGY

Research is a combination of two words i.e. re + search means to search again , anew or over again the existing things. Research in common mode refers to a search for knowledge. Research is a scientific and systematic search for pertinent information on a specific topic. Research is a systematized effort to gain new knowledge. According to Redman and mory

3.1 NATURE OF STUDY

This study has defining nature. Main focus of the study is to analyze the efficiency and productivity growth of currency option. The study ascertains the relation between bidask spreads and the contract maturity of OTC currency options. Contrary to previous findings in the futures market, spreads of currency options are found to be negatively related to the contract's term-to-maturity. The negative relation persists even after controlling for the effects of price risks, competition, and trading activity. The pronounced differences in the term-to-maturity results are attributable to the market risk effect and differences in the market structure of options and futures markets.

3.2 OBJECTIVES OF STUDY

The main aim of study is to find out the truth which is hidden. Each study has its own specific purpose and this study objective is :

1. Gain the knowledge about feature and types of a currency option like otc option market, Standardized market and call option, put option, Amercian and European option. 2. Different quotation of the currency option market like intrinsic value and time value. 3. know about the various terminology used in option trading like parties to an option contract, exercise price, option premium and time value of option. 4. Gains and losses of the option traders. And see the various hedging strategy like straddle, strangle, spred etc. 5. See option pricing and the factor influencing it. And understand the concept and various determinants of option pricing model like Black-Scholes option model, Binomial option pricing model etc. 6. How hedgers and speculators operate in this market.

3.3 RESEARCH DESIGN

A research design is the arrangement of conditions for collection and analysis of data in a manner that aims to combine relevance to the research purpose with economy in procedure. The research design used in my study is basically descriptive in nature. The researcher comes to the decision which is precise and rational. The study is conclusive because after doing the study the researcher comes to a conclusion regarding the risk management in different bank . The study is statistical because throughout the study all the similar samples are selected and group together.

Research Design

Exploratory Research

Diagnostic Research

Descriptive Research

Experimental Research

In the study I will apply descriptive research design. As descriptive research design is the description of state of affairs, as it exists at present. In this type of research the researcher has no control over the variables he can only report what has happened or what is happening.

3.4 Sample size

For carrying out any research or study on any subject it is very difficult to cover even 10% of the total population. Therefore the sample size has to be decided for a meaningful conclusion. For designing the sample size, it was thought proper to cover a very small percentage of population in various age groups. The method used for sample technique

was non probability convenience sampling method. This method is used because it is known previously as to whether a particular person will be asked to fill the questionnaire. Convenient sampling is used because only those people will be asked to fill the questionnaires that were easily accessible and available to the researcher. Considering the constraints, it was decided to conduct the study based on sample size of 25 people. Scientific method is not adopted in this study because of financial constraints and also because of lack of time; also the basic aim of doing the research is academic, hence most convenient way is selected.

SAMPLE DESIGN
A sample design is a definite plan for obtaining a sample from a given population. It refers to the technique or method the researcher would adopt in selecting items for the sample. Sample design may as well lay down the number of items to be included in the sample i.e. the size of sample. Sample design is determined before data are collected. There are many sample designs from which a researcher can choose. Some designs are relatively more precise and easier to apply than other. The research report is based on the following two sampling designs. 1. Judgment sampling;- The selection of the sample is exclusively depend on the judgment of the investigator. Investigator exercises his judgment in the course and includes those items in the sampling which he thinks are most typical of the universe with regard to the characteristics under study. 2. Convenience sampling: - In this type of sampling, the choice of the sampling is left completely to the convenience of the investigator. The investigator obtains his sample according to his convenience.

3.5 SCALING TECHNIQUE

The scaling technique is used to analyses the data collected from the survey. By scaling we mean the process of assigning numbers to objects or observation, the levels of measurement being a function of the rules under which the numbers are assigned. The most widely used classification of measurement scales are:Rating scale Nominal Scale Differential Scale Likerts scale The research study is based on the the Likerts scaling method

Likert-type scale:
The scale consists of a number of statements which express either a favorable or unfavorable attitude towards the given object to which the respondent is asked to react. The respondent indicates his agreement and disagreement with each statement in the instrument. Each response is given a numerical score, indicating its favorableness or unfavourableness, and the scores are totaled to measure the respondents attitude. In other words, the overall score represents the respondents position on the continuum of favourable-unfavourableness towards an issue. In this scale, the respondent is asked to respond to each of the statement in terms of several degrees, usually 5degrees of agreement and disagreement. E.g., when asked to express opinion whether one considers his job quite pleasant, the respondent may respond in any one of the following ways:a) strongly agree b) Agree c) Undecided d) Disagree

e) Strongly disagree

3.6 DATA COLLECTION

To achieve at some fruitful results the task of data collection begins after a research problem has been define There are two ways to collect the data these are; Primary data Secondary data Primary Data: - The primary data are those which are collected afresh and for the first, and thus happened to be original in character. The primary data is collected from survey and by making the use of questionnaires. Secondary Data: - The secondary data on the other hand, are those which have already been collected by someone else and which have already been passed through the statistical process. The secondary data collected from the annual reports, pumplates, magazines, broachers etc.

3.7 SIGNIFICANCE OF THE STUDY

The study has been carried out mainly to gather information about the currency option. It would help to know about the history and origin of currency option. It would help to know about the various terminology of currency option. It would help to know about the various option pricing model like Black-Scholes option model Binomial option pricing model etc.

 It would help to know about the various hedging strategy like straddle, strangle, spred etc. Problems faced by the customers and can be known and better steps can be undertaken for the removal of flaws.

3.8 STATISTICAL TOOL

To analyze the data statistical tool named correlation is used. Correlation Analysis is

basically used to determine the degree of relationships between different variables. It refers to the statistical technique that is used in measuring the closeness of relationship between two or more variables.
For measuring the correlation between investment and return . Correlation is represented by r. The formula used in this case -

Where x and y are two variables under consideration. The value of coefficient of correlation obtained shall lie between +1 to -1. When r =+1 then there is perfect positive correlation between the variables. When r=-1 then there is perfect negative correlation between the variables. When r =0 then there is no relationship.

After applying group correlation to the data the value of r comes define the amount of correlation or say relationship between the variables taken into consideration.

CHAPTER 4 DATA ANALYSES AND INTERPRETATION

Data analysis is a process of gathering, modeling, and transforming data with the goal of highlighting useful information, suggesting conclusions, and supporting decision making. Data analysis has multiple facets and approaches, encompassing diverse techniques under a variety of names, in different business, science, and social science domains. Ques1.

O c c u p a tio n

P rofes s ion al 28%

S ervic em a n 1 2%

B us ines s m an 60 %

This graph show the occupation of respondents. In this graph businessman are 60%, serviceman are 12% and professional are 28%. Sample sizes was 25. Mainly businessman and professional knows about currency option.

Que.2
Age

More than 45year 32%

Less than 25 year 8% 25-35year 12%

35-45year 48%

This graph shows the age group of respondent. Mainly above 35 year persons know about the currency option. Less than 25of age was 8%, 25-35 was 12%, 35-45 was 48% and more than 45 year was 32%. Que.3
Do you know about currency option?
no 12%

yes 88%

This graph show that all 88 % respondent was aware about currency option and 12% respondent was not aware about currency option.

Que.4
Investment in currency option increased day by day?
10 9 8 7 6 5 4 3 2 1 0 9 8

No. of respondent25

4 1

Series1 3

Strongly agree

Agree

Undecided Disagree

Strongly disagree

This graph show that investment in currency option increased day by day . 9 person strongly agree , 8 person agree , 1 person was undecided , 4 person disagree and 3 person strongly disagree with this statement. Que.5
From where you get the knowledge regarding currency option ?

others 8% Television 16% New spaper 32%

Brokerage company 44%

This graph show that mainly 44% person gain knowledge regarding currency option through brokerage company , 32% person through newspaper , 16% person through television and 8% person through other sources books etc.

Que.6
Trading in US dollar is more preferd by investor?
12 No.of respondent25 10 8 6 4 2 0 Strongly agree Agree Undecided Disagree Strongly disagree 2 3 2 10 8 Series1

This graph show that mainly 10 person strongly agree , 8 person only agree , 2 person is undecided , 3 person is disagree and 2 person is strongly disagree with this statement. Que.7

Trading in Euro is more preferd by investor?

10 9 8 7 6 5 4 3 2 1 0 9

No of respondent25

6 4 4 2 Series1

Strongly agree

Agree

Undecided Disagree

Strongly disagree

This graph show that 6 person strongly agree , 9 person is only agree , 4 person is undecided , 4 person is disagree and 2 person is strongly disagree with this statement.

Que.8
How much amount is invested by you in currency option ?

More than 1 crore 12% 10 lakh-1 crore 24%

Less than 1 lakh 24%

1 lakh-10 lakh 40%

This graph show that 40% person invest 1 lakh-10 lakh , 24% person invest more than 10 lakh but less than 1 crore , only 12% person invest more than 1 crore and 24% person invest less than 1 lakh . Que.9
Investor mostly preferd own funds for trading in currency option ?
10 9 8 7 6 5 4 3 2 1 0 8 9

No of respondent25

Series1 3 2 3

Strongly agree

Agree

Undecided Disagree

Strongly disagree

This graph show that 8 person strongly agree, 9 person only agree, 3 person is undecided, 2 person disagree and 3 person strongly disagree this statement.

Que.10

Investor mostly prefer borrowing funds for trading in currency option?

8 7 6 5 4 3 2 1 0 7 6 5 4 3 Series1

No of respondent25

Strongly agree

Agree

Undecided Disagree

Strongly disagree

This graph show that investor prefer borrowing fund . 6 person strongly agree , 5 person agree , 4 person undecided , 7 person disagree and 3 person strongly disagree this statement . Que.11
Trading in short call and put incresing day by day?
12 No of respondent 25 10 8 6 4 2 0 Strongly agree Agree Undecided Disagree Strongly disagree 10

6 3 4 2

Series1

This graph show that investor prefer short call and put . And 10 person strongly agree , 6 person agree , 3 person undecided , 4 person disagree and 2 person strongly disagree.

Que.12
Trading in long call and long put decreasing day by day?
10 9 8 7 6 5 4 3 2 1 0 9

No. of respondent 25

6 5 4 2

Series1

Strongly agree

Agree

Undecided

Disagree

Strongly disagree

This graph show that long term trading is decreasing day by day . 6 person strongly agree , 4 person agree , 2 person undecided , 9 person disagree and 5 person strongly disagree. Que.13
Investor prefered brokerage company for trading in currency option?
9 8 7 6 5 4 3 2 1 0 8 6 4 3 4 Series1 No.respondent of25

Strongly agree

Agree

Undecided Disagree

Strongly disagree

This graph show that investor preferred trading through brokerage company . 6 person strongly agree , 4 person agree , 3 person undecided , 8 person disagree and 4 person strongly disagree this statement.

Que.14
Investor prefered banks for trading in ccurrency option ?
No. of respondents 25 12 10 8 6 4 2 0 Strongly agree Agree Undecided Disagree Strongly disagree 6 4 2 2 Series1 11

This graph show that investor preferred trading through banks . 11 person strongly agree , 6 person agree , 2 person undecided , 4 person disagree and 2 person strongly disagree this statement . Que.15
OTC market is consider best for trading?
9 8 7 6 5 4 3 2 1 0 8 6 5 4 2 Series1

No. of res pondents 25

Strongly agree

Agree

Undecided Disagree

Strongly disagree

This graph show that 8 person strongly agree , 4 person agree , 6 person undecided , 2 person disagree and 5 person strongly disagree with this statement .

Que.16
Standardised market is consider best for trading?
No. of respondents 25 14 12 10 8 6 4 2 0 Strongly agree Agree Undecided Disagree Strongly disagree 1 6 3 2 Series1 13

This graph show that 13 person strongly agree , 6 person agree , 1 person undecided , 3 person disagree and 2 person strongly disagree with this statement . Que.17
Investors mostly analyse the currency option market before investment?
No. of respondents 25 14 12 10 8 6 4 2 0 Strongly agree Agree Undecided Disagree Strongly disagree 2 2 1 12 8 Series1

This graph show that investor analyses the currency before investment . 12 person strongly agree , 8 person agree , 2 person undecided , 2 person disagree and 1 person strongly disagree.

Statistical tool
In this study show correlation between US dollar and Euro. In this project data of 2 march 2009 to 6 march 2009 have been collected for analysis. US Dollar rate is denoted ------- X Euro rate is denoted Us dollar rate ( x) 51.8847 51.9699 51.5348 51.7698 51.6954 -------- Y Euro rate dx o.3499 0.4351 0 0.253 0.1606 dx = 1.1806 dx2 0.1224 0.1893 0 0.0552 0.0258 dx2 = 0.3927 ( y) 65.354 65.56 64.702 64.997 65.4361 dy 0.652 0.858 0 0.295 0.7341 dy = 2.5391 dy2 0.4251 0.7362 0 0.0870 0.5389 dy2 = 1.7872 dxdy 0.2281 0.3733 0 0.0693 0.1179 dxdy = 0.7886

dx = X 51.5348 dy = Y 64.702 N=5

r= 5 (0.7886) (1.1806) (2.5391) 5 (0.3927) (1.1806)2 5 (1.7872) - (2.5391)2 r = 0.79 Where x and y are two variables under consideration. The value of coefficient of correlation obtained shall lie between +1 to -1. When r =+1 then there is perfect positive correlation between the variables. When r =-1 then there is perfect negative correlation between the variables. When r =0 then there is no relationship. In US Dollar and Euro coefficient of correlation is o.79 than positive high degree of correlation.

CHAPTER 5 FINDING AND SUGGESTION

FINDING:
1. From the study it has been found out that, most of the businessman investing in currency option. 2. Only the investors who are actually dealing in the market is aware about currency option, not the general public. 3. Complete information is requiring for trading in currency option. 4. Mostly investors invest for short period. 5. Brokerage Company is the only source of information to investor.

Suggestion:
1. Standardized market is considered best for trading. 2. SEBI must issue such kind of guideline that provides information to general public. 3. Banks should provide financial assistance to the investors. 4. Trading process should be easy so that no proper guidance is required. 5. The market must provide some advisor for investment in currency option.

CHAPTER 6 LIMITATION OF THE STUDY

Various hindrances occurred while carrying out the research. They have acted as limitation of the study and a few of them are:1. Short time period: The time period for carrying out the research was short as a result of which many facts have been left unexplored. 2. Small area for research: The area for study was kaithal which is quite a small area to judge out the consumer preferences for the various brands of television. 3. Lack of resources: Lack of time and other resources as it was not possible to conduct survey at large level. 4. Small no. of respondents: Only 25 respondents have been chosen which is small number, to represent whole of the population. 5. Unwillingness of respondents: While collection of the data many consumers were unwilling to fill the questionnaire. Respondents were having a feeling of wastage of time for them.

BIBLIOGRAPHY
BOOKS:
Vyuptakesh Sharan:International Financial Management,Prentice Hall of India, New.Delhi. Alok Pandey: Multinational Business Finance, PearsonEducation. Shapiro: Multinational Financial Management, Prentice Hall of India, New.Delhi. Surendra S.Yadav: Foreign Exchange Markets, Macmillan India Ltd.

Hull, John C. (2005), Options, Futures and Other Derivatives (excerpt by Fan Zhang) (6th ed.), Prentice-Hall, ISBN 0131499084, http://fan.zhang.gl/ecref/options
Kothari C.R.:Research Methodology, Wishawa Parkashan 2nd Edition. Golden, Biddle, Koren and Moren D. Locke: Compasing Qualitative Research, Sage Publication,1997. T.R.Jain: Statistics, V.K. Enterprises,N.Delhi.

R.P.Hooda: Statistics For Business And Economics, Macmillan, N.Delhi. S.P.Gupta: Statistical Methods, Sultan,N.Delhi. Levin, Richard I and David S. Rubin: Statistics For Management, Prentice Hall of India, New.Delhi.

Websites:

www.sciencedirect.com/science

http://fan.zhang.gl/ecref/options http://www.cme.com/trading/. http://www.iseoptions.com/products_traded.aspx http://www.amazon.com/Volatility-Surface-Practitioners-GuideFinance/dp/0471792519.

http://www.institut.math.jussieu.fr/~boka/enseignement/isifar/refs/Ref_Asiat iques_Rogers_Shi_95.pdf
http://pluto.huji.ac.il/~msfalkin/pdfs/99-01.pdf

http://www.ccny.cuny.edu/social_science/Kfoster/research/Cakici_Foster_currency_RN HD.pdf

http://www.ims.nus.edu.sg/activities/wkcf/files/bslow1.pdf http://www.smartquant.com/references/TimeSeries/ts3.pdf

QUESTIONNAIRE
NAME : _____________ ADDRESS : __________________________________ _____________________ Ph. _________ OCCUPATION: Ans. a) Businessman b) Serviceman AGE: Ans. a) Less than 25 year b) 25-35 year c) 35-45 year d) More than 45 year 1. Do you know about currency option? Ans. a) Yes b) No c) Professional

2. from where you get the knowledge regarding currency option? Ans. a )Newspaper b) Broking company c) Television d) Other

3. Investment in currency option increased day by day? Ans. a) Strongly agree b) Agree c) Undecided d) Disagree e) Strongly disagree

4. Trading in U$ Dollar is more preferred by investor? Ans. a) Strongly agree b) Agree c) Undecided d) Disagree e) Strongly disagree

5. Trading in Euro is more preferred by investor? Ans. a) Strongly agree b) Agree c) Undecided d) Disagree e) Strongly disagree

6. How much amount is invested by you in currency option? Ans. a)Less than Rs.1,00,000 d)more than Rs.1 crore 7. People mostly preferred own fund for trading in currency option? Ans. a) Strongly agree b) Agree c) Undecided d) Disagree e) Strongly disagree b) Rs.1,00,000-10,00,000 c) Rs.10,00,000-1crore

8. People mostly borrowing fund for trading in currency option? Ans. a) Strongly agree b) Agree c) Undecided d) Disagree e) Strongly disagree

9. Trading in short call and put increases day by day? Ans. a) Strongly agree b) Agree c) Undecided d) Disagree e) Strongly disagree

10. Trading in long call and put increases day by day? Ans. a) Strongly agree b) Agree c) Undecided d) Disagree e) Strongly disagree

11. Investor preferred brokering company for trading in currency option? Ans. a) Strongly agree b) Agree c) Undecided d) Disagree e) Strongly disagree

12. Investor preferred banks for trading in currency option? Ans. a) Strongly agree b) Agree c) Undecided d) Disagree e) Strongly disagree

13. Over-the-counter market is consider best for trading? Ans. a) Strongly agree b) Agree c) Undecided d) Disagree e) Strongly disagree

14. Standardized market is considered best for trading? Ans. a) Strongly agree b) Agree c) Undecided d) Disagree e) Strongly disagree

15. Investors mostly analyses the currency option market before investment? Ans. a) Strongly agree b) Agree c) Undecided d) Disagree e) Strongly disagree