EFTA01353411

formula, chart. last sale, or the prices of the underlying interest, related interests or other options at any partic- ular time. The currency in which the premium is payable is called the premium currency. The premium currency for most options is U.S. dollars. However, the premium currency for cross-rate foreign currency options, which are discussed in Chapter VI, is a foreign currency, and other options with premiums payable in a foreign cur- rency may be introduced after the date of this booklet. OPENING TRANSACTION-This is a purchase or sale transaction by which a person establishes or in- creases a position as either the holder or the writer of an option. CLOSING TRANSACTION-This is a transaction in which, at some point prior to expiration, the option holder makes an offsetting sale of an identical option, or the option writer makes an offsetting purchase of an identical option. A closing transaction in an option reduces or cancels out an investor's previous position as the holder or the writer of that option. EXAMPLE: In June an investor buys a December XYZ 50 call at an aggregate premium of $500. By September the market price of the option has in- creased to $700. To seek to realize his $200 profit, the investor can direct his broker to sell an offsetting De- cember XYZ 50 call in a closing transaction. On the other hand. it by September the market price of the option has decreased to $300, the investor might still decide to sell the option in a closing transaction, thereby limiting his loss to $200. Although holders of American-style options have the right to exercise at any time before expiration, holders frequently elect to realize their profits or losses by mak- ing closing transactions because the transaction costs of the closing transactions may be lower than the transaction costs associated with exercises, and be- cause closing transactions may provide an opportu- nity for an option holder to realize the remaining time value (described below) of the option that would be lost in an exercise. The limited period of exercisability of a European-style or capped option means that (ex- cept for the possibility of automatic exercise of a capped option) the holder's only means of realizing profit or loss on the option when the option is not exercisable is by selling the option in a closing transaction. 12 CONFIDENTIAL - PURSUANT TOEFEESERMIRMY.773 P. 6(e) CONFIDENTIAL SDNY_GM_00183957 EFTA01353411