The Philadelphia Stock Exchange, which originated trading in foreign currency options, next month will launch a new option geared to short-term currency hedging. The new trading product, known as a virtual currency or 3-D deutsche mark option, will be the first exchange-traded currency option to settle weekly in U.S. dollars.
It is intended to allow institutional and retail investors to participate in the currency market without incurring the expense and complications of establishing banking lines to buy or sell the underlying currency upon delivery.
The new options will facilitate weekend currency exposure hedging and offer a means of hedging OTC currency positions which typically expire on Monday mornings, said Joseph Rizzello, a PHLX executive vice president and director of new product marketing.
"These are one- and two-week options," he said. "They settle on Monday morning at 10:30. We will use a series of different banks to get the settlement value."
Mr. Rizzello said that he expects more retail customers to be attracted to the 3-D options than institutional customers.
"There could be a considerable amount of retail interest in these," he said. "They are much more simple to understand. Plus there is more focus now on foreign exchange on the retail side than before.
"Operationally, it will look and act as an index option,"he said. "If you're looking for a short-term play in dollars and Deutschemarks, you can do it with these."
Unlike traditional currency options, this options contract specifies that the investor receives or pays in dollars, rather than Deutschemarks, the difference in the strike and settlement price.
The strike price is the price at which the option buyer agrees to exchange currencies on or before a predetermined expiration date. The settlement price is the exchange rate at the option's expiration.
A currency option is the right, but not the obligation, to exchange one currency for another at a fixed exchange rate on or before a predetermined expiration date.
The 3-Ds are two-week expiration options, with a new series to be listed every week, offering an opportunity for short-term hedging, positioning, and speculating.
"With none of the risk of taking delivery of the underlying currency, this product will become an essential trading and hedging tool for retail investors, money managers, and corporations, Mr. Rizzello said."