Non-Equity Options: Foreign Currency and Yield-Based
Chapters in this video
- 0:00 Why non-equity options trip up Series 7 candidates
- 1:08 Foreign currency contract specs and the yen exception
- 2:25 European-style but physical-delivery settlement trap
- 2:42 Currency directional logic and the USD seesaw
- 3:09 Yield-based option specs and the 35 equals 3.5% trick
- 4:17 Inverse yields and bond prices: hedging with a long yield call
- 6:24 Rapid-fire exam recap
What this video covers
- Why foreign currency options are European-style yet still settle by physical delivery of the underlying currency, not cash
- The Japanese yen contract-size exception (1,000,000 units) versus the standard 10,000 units for every other currency
- Directional logic on currency options: a call on a foreign currency is bullish on that currency and bearish on the U.S. dollar (USD)
- How yield-based options track the yield on U.S. Treasury securities (13-week T-bill, 5-year and 10-year T-note, 30-year T-bond) and settle in cash
- The decimal-shift trick on yield strikes: a strike of 35 represents a 3.5% yield, not 35%
- Why a long yield-based call profits when rates rise (bearish on bond prices), making it the right hedge for a bond portfolio against rising interest rates
- The shared European-style exercise rule that applies to both foreign currency and yield-based contracts
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