Currencies traded – the Philadelphia Stock Exchange (PHLX) lists six dollar-based standardised
currency option contracts, which settle upon exercise in the actual physical currency, while
the Chicago Mercantile Exchange (CME) lists 14 currency option contracts, which includes
crosses, for example European euro against the Swiss franc.
Contract size – the amounts of currency controlled by the various currency options contracts
are geared to the needs of the widest possible range of participants. For example, the sizes
expressed in units of currency for each option on the PHLX are:
US dollar vs Australian dollar 50 000 Australian dollar (units)
US dollar vs British pound 31 250 British pound (units)
US dollar vs Canadian dollar 50 000 Canadian dollar (units)
US dollar vs European euro 62 500 European euro (units)
US dollar vs Japanese yen 6 250 000 Japanese yen (units)
US dollar vs Swiss franc 62 500 Swiss franc (units)
Exercise style – Both American and European style options are available for mid-month and
month-end options. However, longer-term options are European style options only.
Expirations – the exchange offers a variety of expirations, including mid-month, month-end
and some longer-term options. For example, currency options are available for trading with
fixed quarterly months of March, June, September and December.
Exercise prices – prices are expressed in terms of American cents per unit of foreign currency.
For example, a call option on euros with an exercise price of 95 would give the option buyer
the right to buy euros at 95 cents per euro. On the exchange, exercise prices are set at certain
intervals surrounding the current spot or market price for a particular currency. When significant
price changes take place, additional options with new exercise prices are listed and commence
trading. Also, strike price intervals vary for the different expiration time frames. They are
narrower for the near-term and wider for the long-term options.
Premium quotation – premiums for dollar-based options are quoted in American cents per
unit of the underlying currency (with the exception of Japanese yen which are quoted in
hundredths of a cent). For example, a premium of 0.95 for a given European euro option is
($0.0095) per euro. Since each option is for 62 500 euros, the total option premium would be
$593.75 (62 500 × $ 0.0097).
CUSTOMISED OPTIONS
Customised currency options can be traded on any combination of the currencies currently
available for trading. Currently, the Australian dollar and the Mexican peso may be matched
with the American dollar only, and must be denominated in American dollars.
Underlying currency – the underlying currency is that currency which is purchased (in the case
of a call) or sold (in the case of a put) upon exercise of the contract.
Base currency – the base currency is that currency in which terms the underlying is being
quoted, i.e. strike price.
Expiration/Last trading day – expirations can be established for any business day up to two
years from the trade date. Customised option contracts expire at 10:00am Eastern Time on the
expiration day in contrast with standardised options, which expire at 2:30pm Eastern Time on
the expiration day. In addition, the exercise and assignment process for customised options is
more akin to the OTC market in terms of expiration time frame. Unlike the process utilised
for standardised options, exercise notices must be received by 10:00am Eastern Time and the
writer is then notified of the number of contracts assigned.
Contract size – the underlying currency determines the contract size and is the same size
as standardised contracts. In the case where the dollar is the underlying, the contract size is
$50 000. Note that the Mexican peso is only available in the customised environment.
Underlying currency:
Australian dollar 50 000 Australian dollar (units)
British pound 31 250 British pound (units)
Canadian dollar 50 000 Canadian dollar (units)
European euro 62 500 European euro (units)
Japanese yen 6 250 000 Japanese yen (units)
Swiss franc 62 500 Swiss franc (units)
Mexican peso 250 000 Mexican peso (units)
American dollar 50 000 American dollars (units)
Exercise prices – exercise or strike prices may be expressed in increments out to four characters.
For example, a $/£ option could have an exercise price of 1.5430.
Exercise style – European style only.
Minimum transaction size – since customised currency options were designed for the institutional
market, there is a minimum opening transaction size, which equals or exceeds
50 contracts. For example, 55 contracts would be acceptable.
Contract terms – an option strike price may be expressed in either American terms or European
terms (inverse terms). For example, an option in American terms would have exercise prices
quoted in terms of dollars per unit of foreign currency. An option in European or inverse terms
would have exercise prices quoted in terms of units of foreign currency per dollar.
Trading process – trading is conducted in an open outcry auction market, just as in standardised
option contracts.
Premiums – premiums may be expressed either in terms of the base currency per unit of the
underlying currency or in per cent of the underlying currency (based on contract size). For
example, the premium for an option on the dollar versus the euro (dollar being the base currency
and the euro being the underlying currency) could be expressed in American cents per euro or
as a percentage of 62 500 euros.
Position limits – position limits are the maximum number of contracts in an underlying
currency that can be controlled by a single entity or individual. Currently, position limits are
set at 200 000 contracts on each side of the market (long calls and short puts or short calls
and long puts) for each currency, except the Mexican peso, which is 100 000 contracts. For
purposes of computing position limits, all options involving the dollar against another currency
will be aggregated with each other for each currency (i.e. usd/eur and jpy/eur on the same side
of the market will be aggregated – usd/eur long calls and short puts with jpy/eur short calls
and long puts).
Read More: Standardised Options And Costumize Options
