Key product features
• Participate in favourable exchange rate moves up to the cap level.
• Cheaper than the equivalent Vanilla.
• Upfront premium.
• Limited upside/downside.
Product description/scenario
• A Spread is a modification of the Vanilla, where the purchaser of the Spread buys a Vanilla Option at one strike, and sells another Vanilla Option that is further Out-The-Money than the first. This puts a cap on the upside of the purchased option.
• The holder of the Spread is able to capture all profits in excess of the premium up to the strike of the sold option.
• Spreads can facilitate both bullish (Call Spread) and bearish (Put Spread) views.
Example trade profile
Payout profile at expiry
Payoff description
• If spot at expiry is:
– At or below the strike (1.3000), the client is free to trade at the prevailing market rate.
– In between the strike (1.3000) and the cap (1.4000), the client purchases EUR at 1.3000.
– At or above the cap (1.4000) the client can transact at a rate effectively 10 cents lower than spot, thereby realizing the maximum profit of this trade.
Variations
• Calendar Spread:
– Two Call Options (or two Put Options) with different expiry dates.
• Diagonal Spread:
– Two Call Options (or two Put Options) with different strikes and different expiries.