International Finance : Article Review of European Currency Option

Running head: INTERNATIONAL FINANCE
INTERNATIONAL FINANCE
Name of the Student:
Name of the University:
Author Note:

INTERNATIONAL FINANCE1
Memorandum
To:
From:
Cc:
Subject: Article review of European Currency Option
The purpose of this memorandum is to provide an in-depth knowledge of the European
currency option. The option that provides the investors the right to purchase or trade but not
the obligation, relating to a particular currency that is determined at a pre-determined
exchange rate before expiry of the option is known as currency option. Investors can avail the
currency option to hedge the risk associated with the currency or can speculate on the
currency moves. One of the version of currency options contract is European option, which
can be exercised only after its expiration date (Almgren & Li, 2016). In this option contract,
the investor cannot exercise the option before the final day of its maturity; the investor could
not take delivery of or sell the shares even if the cost of the underlying asset is beneficial for
the investor. The call and put option on the currency can only take place on the expiry of its
life. This option provides the investors with two alternatives either to buy the underlying
asset or to hold the basic asset at a contract price known as strike price. The Black Scholes
model could be used to value the European contract option for better understanding of the
concept (Dar & Anuradha, 2017).
The indexes uses European option as it minimises dependence on the accounting concept
needed for the options contract by the brokerage. One unit of foreign exchange assumed to be
basic call and put of the underlying asset that needs to be delivered. A European call option
offers right to the owner to purchase the underlying security at maturity date of the contract