EFTA01393118.pdf

prices available in that market are only generally re- lated to prices in the "wholesale" interbank market, and it is unlikely that the prices in the retail market will be as favorable as the prices for transactions in large amounts of foreign currency. SPECIAL CHARACTERISTICS OF FOREIGN CURRENCY OPTIONS Foreign currency options. like other options, provide opportunities for investment and pose risks to inves- tors as a result of fluctuations in the value of the under- lying interest. Just as certain options on equity securities are priced in relation to the price of the un- derlying security, dollar-denominated foreign currency option prices will generally depend in significant part on the U.S. dollar value of the underlying foreign cur- rency. Similarly, the prices of cross-rate options will tend to depend on the relative values of the underlying currency and the trading currency. The relationship between the value of an underlying foreign currency relative to the trading currency and the prices of options on that underlying foreign cur- rency can be summarized as follows: 1. If the value of an underlying foreign currency rises in relation to the trading currency. call premiums will normally increase and put premiums decrease. 2. If the value of an underlying foreign currency de- creases in relation to the trading currency. call premi- ums will normally decrease and put premiums increase. EXAMPLE: Assume a dollar-denominated call option gives its holder the right to purchase British pounds at $1.35 each. At expiration. that option will have intrinsic value if the price of the British pound is above $1.35. At the same time, it will have no intrinsic value it the price of the pound is equal to or below $1.35. The change in the price of British pounds may result from a change in the value of the U.S. dollar relative to all other currencies ("strong" dollar. "weak" dollar). from a change peculiar to the British pound ("strong" pound. "weak" pound), or from a combina- tion of the two. In any case, the final measure of the Intrinsic value of the option will be the value of the British pound relative to the U.S. dollar. EXAMPLE: Assume a cross-rate call option gives its holder the right to purchase British pounds at 2.50 German marks ("DM") each. At expiration, that option will have intrinsic value if the price of the British pound in German marks is above DM2.50. It will have no 37 CONFIDENTIAL - PURSUANT TOEFEESERND5066522 P. 6(e) CONFIDENTIAL SDNY_GM_00244706 EFTA01393118