1. Copyright © 2006 Pearson Addison-Wesley. All rights reserved.7-1 Loss Profit (US cents/SF) + 1.00 + 0.50 0 - 0.50 - 1.00 57.558.059.059.558.5 Limited loss Unlimited profit Break-even price Strike price “Out of the money”“In the money” “At the money” Spot price (US cents/SF) The buyer of a call option on SF, with a strike price of 58.5 cents/SF, has a limited loss of 0.50 cents/SF at spot rates less than 58.5 (“out of the money”), and an unlimited profit potential at spot rates above 58.5 cents/SF (“in the money”). Profit & Loss for the Buyer of a Call Option

2. Copyright © 2006 Pearson Addison-Wesley. All rights reserved.7-2 Loss Profit (US cents/SF) + 1.00 + 0.50 0 - 0.50 - 1.00 57.558.059.059.558.5 Limited profit Unlimited loss Break-even price Strike price “At the money” Spot price (US cents/SF) The writer of a call option on SF, with a strike price of 58.5 cents/SF, has a limited profit of 0.50 cents/SF at spot rates less than 58.5, and an unlimited loss potential at spot rates above (to the right of) 59.0 cents/SF. Profit & Loss for the Writer of a Call Option

3. Copyright © 2006 Pearson Addison-Wesley. All rights reserved.7-3 Loss Profit (US cents/SF) + 1.00 + 0.50 0 - 0.50 - 1.00 57.558.059.059.558.5 Limited loss Profit up to 58.0 Strike price “In the money”“Out of the money” “At the money” Spot price (US cents/SF) The buyer of a put option on SF, with a strike price of 58.5 cents/SF, has a limited loss of 0.50 cents/SF at spot rates greater than 58.5 (“out of the money”), and an unlimited profit potential at spot rates less than 58.5 cents/SF (“in the money”) up to 58.0 cents. Break-even price Profit & Loss for the Buyer of a Put Option

4. Copyright © 2006 Pearson Addison-Wesley. All rights reserved.7-4 Loss Profit (US cents/SF) + 1.00 + 0.50 0 - 0.50 - 1.00 57.558.059.059.558.5 Unlimited loss up to 58.0 Limited profit Strike price Spot price (US cents/SF) The writer of a put option on SF, with a strike price of 58.5 cents/SF, has a limited profit of 0.50 cents/SF at spot rates greater than 58.5, and an uanlimited loss potential at spot rates less than 58.5 cents/SF up to 58.0 cents. Break-even price “At the money” Profit & Loss for the Writer of a Put Option

5. Copyright © 2006 Pearson Addison-Wesley. All rights reserved.7-5 1.691.701.711.721.731.681.671.66 0.0 1.0 2.0 3.0 4.0 5.0 Spot rate ($/£) Option Premium (US cents/£) 6.0 1.74 4.00 Intrinsic value 3.30 5.67 1.67 Total value Time value -- Valuation on first day of 90-day maturity -- Strike Price of $1.70/£ Option Pricing and Valuation

6. Copyright © 2006 Pearson Addison-Wesley. All rights reserved.7-6 Exhibit 7.1 Mexican Peso Futures, US$/Peso (CME)

7. Copyright © 2006 Pearson Addison-Wesley. All rights reserved.7-7 Exhibit 7.2 Currency Futures and Forwards Compared

8. Copyright © 2006 Pearson Addison-Wesley. All rights reserved.7-8 Exhibit 7.3 Swiss Franc Option Quotations (U.S. Cents/SF)

9. Copyright © 2006 Pearson Addison-Wesley. All rights reserved.7-9 Exhibit 7.4 Buying a Call Option on Swiss Francs

10. Copyright © 2006 Pearson Addison-Wesley. All rights reserved.7-10 Exhibit 7.5 Selling a Call Option on Swiss Francs

11. Copyright © 2006 Pearson Addison-Wesley. All rights reserved.7-11 Exhibit 7.6 Buying a Put Option on Swiss Francs

12. Copyright © 2006 Pearson Addison-Wesley. All rights reserved.7-12 Exhibit 7.7 Selling a Put Option on Swiss Francs

13. Copyright © 2006 Pearson Addison-Wesley. All rights reserved.7-13 Exhibit 7.9 The Intrinsic, Time, and Total Value Components of the 90-Day Call Option on British Pounds at Varying Spot Exchange Rates

14. Copyright © 2006 Pearson Addison-Wesley. All rights reserved.7-14 Exhibit 7.10 Foreign Exchange Implied Volatility, January 31, 2002