prices available in that market are only generally related to prices in the "wholesale" interbank market, and it is unlikely that the prices in the retail market will be as favorable as the prices for transactions in large amounts of foreign currency. SPECIAL CHARACTERISTICS OF FOREIGN CURRENCY OPTIONS Foreign currency options. like other options, provide opportunities for investment and pose risks to investors as a result of fluctuations in the value of the underlying interest. Just as certain options on equity securities are priced in relation to the price of the underlying security, dollar-denominated foreign currency option prices will generally depend in significant part on the U.S. dollar value of the underlying foreign currency. Similarly, the prices of cross-rate options will tend to depend on the relative values of the underlying currency and the trading currency. The relationship between the value of an underlying foreign currency relative to the trading currency and the prices of options on that underlying foreign currency can be summarized as follows: 1. If the value of an underlying foreign currency rises in relation to the trading currency. call premiums will normally increase and put premiums decrease. 2. If the value of an underlying foreign currency decreases in relation to the trading currency. call premiums will normally decrease and put premiums increase. EXAMPLE: Assume a dollar-denominated call option gives its holder the right to purchase British pounds at $1.35 each. At expiration. that option will have intrinsic value if the price of the British pound is above $1.35. At the same time, it will have no intrinsic value it the price of the pound is equal to or below $1.35. The change in the price of British pounds may result from a change in the value of the U.S. dollar relative to all other currencies ("strong" dollar. "weak" dollar). from a change peculiar to the British pound ("strong" pound. "weak" pound), or from a combination of the two. In any case, the final measure of the Intrinsic value of the option will be the value of the British pound relative to the U.S. dollar. EXAMPLE: Assume a cross-rate call option gives its holder the right to purchase British pounds at 2.50 German marks ("DM") each. At expiration, that option will have intrinsic value if the price of the British pound in German marks is above DM2.50. It will have no 37 CONFIDENTIAL - PURSUANT TaffiESERMIRMY.798 P. 6(e) CONFIDENTIAL SDNY_GM_00183982 EFTA01353432