DRM 18.5: Implementation and Options

What is an FX Swap?

A spot transaction combined with an offsetting forward transaction

Things to consider when choosing a static vs. dynamic hedge approach:

assuming the curve doesn’t change, the general rule for if you will receive a positive roll yield is:

roll yield:

• =

• % roll yield =

Given that F(p/b) > S(p/b):

• The forward price curve is:

• i(p) is what in relation to i(b)

• What position would earn a positive roll yield?

high-interest rate currencies trade at a forward XXX

discount

1. A knock-in option is a

2. A knock-out option is a

3. Binary or digital options pay a

1. A knock-in option is a plain vanilla option that only comes into existence if the underlying first reaches some prespecified level.

2. A knock-out option is a standard option that ceases to exist if the underlying reaches some prespecified level.

3. Binary or digital options pay a fixed amount that does not vary with the difference in price between the strike and underlying price.