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Delivering Currency When a Short Call Is Exercised

Article Quant Q&A · Author: Shyam
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Summary

The document describes the market action for settling an exercised call on EUR, quoted in USD, when the call writer does not already hold the currency to deliver. In its example, the strike is below the expiry spot rate. The writer can buy EUR in the spot market and deliver it to the exercising holder, receiving the strike amount in USD through exercise. The difference between the market purchase cost and the exercise proceeds is a loss per EUR delivered, before accounting for the option structure’s premium.

This is a practical explanation of physical currency delivery and the associated cash flows for a short call. It does not discuss cash-settled contracts, broker procedures, settlement timing, transaction costs, or the other legs of the seagull. The premium may offset some or all of the exercise loss, but the document gives no full payoff analysis of the structure.

Key ideas

  • A short call on EUR may require the writer to deliver EUR when the holder exercises.
  • If the writer lacks EUR, the currency can be bought in the spot market for delivery.
  • The writer receives the strike amount in USD upon exercise.
  • When spot is above strike, buying at spot and delivering at strike creates a loss before premiums.
  • Premiums from the option structure affect the overall result but are not analyzed in detail.

Tags

OptionsForexExecutionRisk management
Full text
# Settlement of currency options


# Settlement of currency options












wanted to understand the market action done to settle a call option.

Let's say I entered into a export seagull for eurusd and on the date of expiry my sell call gets exercised. Assuming that my sell call was at 1.1000 and spot on expiry is 1.1200.

Since my sell call has been exercised, what's the market action that I need to do.

## Answer by AlRacoon (score 2)

https://quant.stackexchange.com/a/47237

If you sold the call on the EUR with a strike of USD 1.10, and you did not have the EUR on hand, you would have to buy EUR at market to deliver to the long call holder. You would buy EUR at USD 1.12 and deliver those EUR to the call holder that exercised. You would receive USD 1.10 on exercise so you would lose USD 0.02 per EUR on the exercise. Of course this would be offset by the premiums you might have received on your structure.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.