FX level 3

Agenda

• Options• Exotic options• The Greeks• Options trading• Margins• Research and

Analysis

• Options

FX options - A contract that grants the holder the right, but not the obligation, to buy or sell currency at a specified exchange rate during a specified period of time. For this right, a premium is paid to the broker, which will vary depending on a series of variables that will be covered in future slides. Currency options are one of the best ways for corporations or individuals to hedge against adverse movements in exchange rates.

FX derivatives explained

The Call• The right to BUY the

underlying instrument at a certain price on a specified future date

• Why? You want to capitalize on an increasing trend in the spot market. The trend could be either long-term or short-term

The Call• Example: You believe EURUSD will rise towards the 1.5000

level in about a month’s time. The spot rate is currently 1.4537. You buy a EURUSD Call with a one month expiry and a strike of 1.4500. The price/premium is 152 pips.

• Upside: Unlimited, and calculated by: – Closing spot price – Strike price - premium =

profit– Example: 1.5000 - 1.4500 - 152 = 348 pips

• Downside: The premium (152 pips) which will be lost if the option is Out-of-The-Money (OTM) at expiry (as opposed to In-The-Money (ITM), or At-The-Money (ATM))

The Put• The right to SELL the

underlying instrument at a certain price on a specified future date

• Why? You want to capitalize on a decreasing trend in the spot market. The trend could be either long-term or short-term

The Put• Example: You believe EURUSD will fall towards the 1.4000

level in about a month’s time. The spot rate is currently 1.4545. You buy a EURUSD Put with a one month expiry and a strike of 1.4500. The price/premium is 149 pips.

• Upside: Unlimited, and calculated by: – Strike price – closing spot price - premium =

profit– Ex. 1.4500 - 1.4000 - 149 = 351 pips

• Downside: The premium (149 pips) which will be lost if the option is not ITM at expiry.

FX options continued…• Exotic options

A type of option that differs from common American or European options in terms of the underlying asset or the calculation of how or when the investor receives a certain payoff. These options are more complex than options that trade on an exchange, and generally trade over the counter.

It’s all Greek to me!• Δ (Delta) represents the rate of change between the

option's price and the underlying asset's price - in other words, price sensitivity.

• Γ (Gamma) represents the rate of change between an option portfolio's delta and the underlying asset's price - in other words, second-order time price sensitivity.

• Θ (Theta) represents the rate of change between an option portfolio and time, or time sensitivity.

• ϒ (Vega) represents the rate of change between an option portfolio's value and the underlying asset's volatility - in other words, sensitivity to volatility.

• ρ (Rho) represents the rate of change between an option portfolio's value and the interest rate, or sensitivity to the interest rate.

Factors affecting the price of an option:•Changes in the price of the underlying security•Strike price•Time until expiration•Volatility of the underlying security•Interest rates

Greeks continued…

Options Trading via SaxoTrader• Low option margin requirements

– Depends on the volatility (Vega) and spot price movement (Delta) of the underlying asset

– Takes hedging-effect of other spot and option positions into account (if the options have expiry on the same date!)

– Can use investments in other products as collateral!

• Assistance with setting up option strategies– Clients can chat directly with

dealers through SaxoTrader

Margins• As with all margin-traded assets, FX has its own, inherent margin requirements

relative to the currencies you are trading, however options have further considerations when calculating your margin requirement

• Delta:– Delta margin = Spot exposure * FX spot margin requirement

• Vega:– Vega margin = Vega * Vol of spot * Vol Factor * Notional amount

Vega calculation

Margins continued…• Example Delta:

– If you purchase a 25 Delta EUR/USD option for 1,000,000, you will have an exposure in the spot of EUR 250,000. If you have a spot margin requirement of 2%, your Delta margin will amount to 2%*250,000 EUR = EUR 5,000 as shown in the table below.

• Example 1 Vega:– A client sells a EUR/USD Call for 1 week with a notional amount of 1 million.

Furthermore, assume that the Vega is 0.055 and the underlying asset has a volatility of 10%. Since the client is a seller of the option, the worst-case scenario for the client is when the volatility increases. Hence, the Vol Factor is found in the "Change up - 1 Week" expiry bucket which lists it as 100%. The Vega margin of the option is then calculated as 0.055 * 10% * 100% *1,000,000 EUR = 5500 EUR.

• Example 2 Vega:– A client buys a 1 month EUR/USD Put for one million EUR with a Vega of 0.12 and

a volatility of 10%. In this case, the worst-case scenario is when the volatility decreases. Therefore, the Vol Factor is to be found in the "Change down - 1 Month" expiry bucket where it is listed as 20%. Using the same equation as above we get Vega margin = 0.12 * 10% * 20% * 1,000,000 EUR = 2400 EUR.

Research and AnalysisSaxo Trader II is packed with research and analysis tools

• Our in house strategy team provide coverage of all the markets including trading ideas

• Our ‘dealer chat’ allows you to access real live traders 24/5

• External analysis from some of the best names in the business

• A technical analysis tool, as well as the study types that exist within Saxo’s comprehensive charts (over 60 different studies to choose from) give you the edge you need

Research and Analysis continued…

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