Question

Use the accompanying chart of currency futures market activity, for Wednesday, December 30, 2010 to answer this question. Of the seven currency futures shown, using the March, 2011 contracts only, assuming equal volatility for each currency, which one had the highest fairly priced dollar value for its at the money 90 day calls?

Currency Futures Trading Summary for Thursday, December 30, 2010
Japanese Yen (CME)-12,500,000; $ per 100% LIFETIME Open High Low Settle Chg High (▲ ▼) Low 1.0621 1.1021 1.1649 Open Int 109,060 273 Mar 111.2145 1.2264 1.2140 1.2260 +.0113 1.2476 Jun 111.2160 1.2277 1.2160 1.2275 .0113 1.2467 Sep 111.2266 1.2271 1.2266 1.2295 +0112 12500 Est vol 74,429; vol Tue 100,018; open int, 109,343, +7,105 Sources: Thomson Reuters, WSJ Market Data Group Canadian Dollar (CME)-CAD 100,000; $per CAD LIFETIME Open High LowSettle Chg High (▲ ▼) Low 9203 9209 9313 9300 Open Int 109,284 1,920 957 1,058 Mar 11 99621.0010.9930 9978 9918 9885 9981 .00051.0010 99560006 9928 -0006 .9900 -0006 Jun 11 9984 9946 9886 9916 9908 9985 9953 9925 Sep 11 Dec 11 Est vol 38,199; vol Tue 61,269; open int, 113,223, +14,279 Sources: Thomson Reuters; WSJ Market Data Group British Pound (CME)-£62,500; $ per £ 9858 LIFETIME Open High Low Settle Chg High (▲ ▼) Mar 11 1.5364 15510 1.5342 .550.0140 1.6279 Jun 11 1.5355 1.5493 1.5332 1.5487.0140 1.6225 Est vol 57,940; vol Tue 59,740; open int, 82,141, +3,795 Low 1.4450 1.5145 Open Int 81,970 133 Sources: Thomson Reuters; WSJ Market Data Group Swiss Franc (CME)-CHF 125,000; $ per CHF LIFETIME Open High Low Settle Chg High (A LOpen Int 46,304 50 8761 Mar 111.0511 1.0592 1.05021.0578 .0060 1.0612 Jun 11 1.0535 1.0602 1.05191.0592 0060 1.0623 Est vol 20,973; vol Tue 29,403, open int, 46,356, +1,411 8780 Sources: Thomson Reuters, WSJ Market Data Group

Answer 1

Total Value of the Option = Intrinsic Value of the option + Time Premium of the Option

Apart from this the sensitivities of the Options can viewed from the Option Greeks like Delta, Gamma, Theta (Time decay),

Vega (Volatility), RHO (Interest Rate)

In the given question, Theta and Vega assumed to be remains the same then when price increases then the value of Option increases by its Delta and when price falls it falls by same Delta.

By looking at the price table of different currencies pair the least movement observed is in CAD that too a downward movement and hence a least change in value of Option. Since Call options is mentioned hence Call options of CAD would be at Fair Value.