NSFW Episode 24: DSK, Coffee, Near-Term Euro

Stallone:

Hey I've got a pretty simple (maybe even stupid) question, but hey, that's what WSO is here for right (okay actually it's for trolling, bitching about targets and bragging about shit that didn't happen, but lets pretend its for learning). So, say the EURUSD does fall to 1.1, and then everything really goes to shit, PIGS fall apart, Germany+France want no more part of them, etc, and the euro gets disbanded (or gets split into a "rich" and "poor" euro, like Midas predicted). What will happen to futures and options? Say I own a put with X=110, or are short futures at 110, what will the payoff be should the currency cease to exist? Will it be as if the EUR traded down to zero, or will it be kept at parity with the dollar untill something else comes up, or maybe something completely different?

Your question is neither simple nor stupid. First off, EURUSD going to 1.1 won't lead to anything going to shit. Germany on its own is fundamentally sound enough to keep the Euro from any monumental failure. The Euro wouldn't be in any real danger until we got to a point where it had never been before. (hypothetically, I will go with 0.6) My "splitting" idea is something which would (in reality, as these things tend to) be politicized, so it would definitely not be an overnight issue. In other words, your position wouldn't be effected as there would be plenty of time for recalculations, reformatting and reorganization. Keep in mind sovereign nations (especially monetary unions which overlap multiple economies) can't just poof and blow up over night. That is precisely one of the reasons the EMU was created. Remember, they are economies not companies. In order for the Euro to trade down to zero as in your scenario, something so monumental would have to happen that futures/options would be the least of our worries. When dealing with currencies you always have to keep the political aspect in mind, simply because governments (starting with our own) have clearly shown that they will step in and interfere with markets. As a result, the likelihood of a Soros vs. GBP scenario becomes almost non existent in today's market cartooniverse.