Tiffany futures contract and exchange rate risk essay

The profit or loss resulting from trading such securities is directly related to, or derived from, another asset, such as a stock.

Tiffany futures contract and exchange rate risk essay

Pricing[ edit ] There are various methods models of evaluation available to value warrants theoretically, including the Black-Scholes evaluation model.

However, it is important to have some understanding of the various influences on warrant prices. The market value of a warrant can be divided into two components: This is simply the difference between the exercise strike price and the underlying stock price.

Tiffany futures contract and exchange rate risk essay

Thus, for instance, for call warrants, if the stock price is below the strike price, the warrant has no intrinsic value only time value—to be explained shortly. If the stock price is above the strike, the warrant has intrinsic value and is said to be in-the-money.

Time value can be considered as the value of the continuing exposure to the movement in the underlying security that the warrant provides. Time value declines as the expiry of the warrant gets closer.

This erosion of time value is called time decay. It is not constant, but increases rapidly towards expiry. The longer the time to expiry, the greater the time value of the warrant. This is because the price of the underlying asset has a greater probability of moving in-the-money which makes the warrant more valuable.

The more volatile the underlying instrument, the higher the price of the warrant will be as the warrant is more likely to end up in-the-money. To include the factor of receiving dividends depends on if the holder of the warrant is permitted to receive dividends from the underlying asset.

An increase in interest rates will lead to more expensive call warrants and cheaper put warrants. The level of interest rates reflects the opportunity cost of capital. Uses[ edit ] Portfolio protection: Low cost Risks[ edit ] There are certain risks involved in trading warrants—including time decay.

Types of warrants[ edit ] A wide range of warrants and warrant types are available. The reasons you might invest in one type of warrant may be different from the reasons you might invest in another type of warrant.

Equity warrants can be call and put warrants. Offer investors the right to buy shares of a company from that company at a specific price at a future date prior to expiration.

Offer investors the right to sell shares of a company back to that company at a specific price at a future date prior to expiration. A covered warrants is a warrant that has some underlying backing, for example the issuer will purchase the stock beforehand or will use other instruments to cover the option.

As with a regular equity index, warrants can be classified at, for example, an industry level. Thus, it mirrors the performance of the industry. Index warrants use an index as the underlying asset. Your risk is dispersed—using index call and index put warrants—just like with regular equity indexes.

They are priced using index points. That is, you deal with cash, not directly with shares. Cash or Share Warrants in which the settlement may be in the form of either cash or physical delivery of the shares - depending on its status at expiry.

Traditional[ edit ] Traditional warrants are issued in conjunction with a bond known as a warrant-linked bond and represent the right to acquire shares in the entity issuing the bond. In other words, the writer of a traditional warrant is also the issuer of the underlying instrument.

Warrants are issued in this way as a "sweetener" to make the bond issue more attractive and to reduce the interest rate that must be offered in order to sell the bond issue.

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At the current exchange rate of NGN /EUR, I have tackled the written part of the assignment and have made the determination to use a put option to hedge the risk of foreign currency fluctuation; Suppose each orange juice futures contract is for 15,pounds of orange juice.

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