CHARACTERISTICS AND
RISKS OF
STANDARDIZED OPTIONS
TABLE OF CONTENTS
Page
CHAPTER I INTRODUCTION ................................ .......... 4
CHAPTER II OPTIONS NOMENCLATURE ..................... 6
CHAPTER III OPTIONS ON EQUITY SECURITIES ......... 12
Features of Stock Options................................ ................................ ................................ ................................ ..... 13
CHAPTER IV INDEX OPTIONS ................................ .......... 15
About Indexes................................ ................................ ................................ ................................ ....................... 15
Features of Index Options ................................ ................................ ................................ ................................ .... 16
CHAPTER V DEBT OPTIONS ................................ ............ 17
Rates, Yields and Prices of Debt Securities 18
Treasury Securities................................ ................................ ................................ ................................ ............... 18
Yield-Based Options................................ ................................ ................................ ................................ ............. 19
CHAPTER VI FOREIGN CURRENCY OPTIONS ............... 20
Market for Foreign Currencies................................ ................................ ................................ ............................. 21
Special Characteristics of Foreign Currency Options................................ ................................ ........................... 21
Special Features of Dollar-Denominated Foreign Currency Options................................ ................................ .... 22
Cross-Rate Foreign Currency Options ................................ ................................ ................................ ................. 24
Special Features of Cross-Rate Options ................................ ................................ ................................ ............... 24
Cash-Settled Foreign Currency Options ................................ ................................ ................................ ............... 25
CHAPTER VII FLEXIBLY STRUCTURED OPTIONS .......... 26
Special Features of Flexibly Structured Options ................................ ................................ ................................ ... 26
CHAPTER VIII EXERCISE AND SETTLEMENT .................. 27
How to Exercise ................................ ................................ ................................ ................................ ................... 28
Assignment................................ ................................ ................................ ................................ ........................... 28
Settlement................................ ................................ ................................ ................................ ............................. 29
CHAPTER IX TAX CONSIDERATIONS, TRANSACTION COSTS AND MARGIN
REQUIREMENTS................................ ................................ ................................ ................................ ...............
30
Tax Considerations ................................ ................................ ................................ ................................ .............. 30
Transaction Costs ................................ ................................ ................................ ................................ ................ 30
Margin Requirements ................................ ................................ ................................ ................................ ........... 31
CHAPTER X PRINCIPAL RISKS OF OPTIONS POSITIONS .................... 31
Risks of Option Holders ................................ ................................ ................................ ................................ ....... 32
Risks of Option Writers ................................ ................................ ................................ ................................ ........ 34
Other Risks................................ ................................ ................................ ................................ ........................... 37
Special Risks of Index Options................................ ................................ ................................ .............................. 39
Special Risks of Debt Options................................ ................................ ................................ ............................... 42
Special Risks of Foreign Currency Options ................................ ................................ ................................ .......... 44
Special Risks of Flexibly Structured Options ................................ ................................ ................................ ........ 46
CHAPTER XI SCOPE AND LIMITATIONS OF THIS BOOKLET ........... 47
SUPPLEMENTS ................................ ................................ ................................ ................................ ..................... 50
November 1995 ................................ ................................ ................................ ................................ .................... 50
October 1996 ................................ ................................ ................................ ................................ ....................... 50
December 1997 ................................ ................................ ................................ ................................ .................... 51
November 1998 ................................ ................................ ................................ ................................ .................... 52