13. The following excerpt appeared in the January 14, 1991, Wall Street Letter:

The Philadelphia Stock Exchange plans to list the first nondollar denominated options to trade in the United States, according to sources at the exchange. The Phlx will list cross-currency options based on the relationships between the Deutsche mark and the Japanese yen, as well as British pound/yen and pound/mark options, a spokesman confirmed.…

The exchange currently lists currency options that are based on the relationship between that currency and the dollar, one Phlx member explained. “If you’re not American,” he added, “then the dollar doesn’t do it for you.” The three new cross-currency options should be attractive to the same banks and broker-dealers that currently trade dollar-based currency options, as well as non-U.S.

entities that have interests in other currencies.

Cross-currency options are “a very big part of international trade and international capital markets,”

and are big over-the-counter products, but none currently trades on an exchange. The advantage of exchange-traded options, the Phlx member said, is that “99% of the customers don’t have the credit”

to trade such a product over-the-counter with a big bank.

a. Explain what the representative of the Phlx means by saying, “If you’re not American, then the dollar doesn’t do it for you.”

b. Why is the credit of customers critical in the OTC market but not for an exchange-traded contract?

c. When the Philadelphia Stock Exchange filed with the SEC to list crosscurrency options, the exchange indicated that the demand for this product has been “spawned by recent large fluctuations and dramatic increases in volatility levels for cross-rate options.” Why would this increase the demand for cross-currency options?