foreign currency options trading
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http://www.Options-Trading-Education.com - Foreign Currency Options Trading - Foreign currency options trading serves two purposes for two groups of traders.Companies doing business internationally commonly make or receive payment in currencies foreign to their own.TRANSCRIPT
Foreign Currency Options Trading
Bywww.Options-Trading-Education.com
Foreign currency options trading serves
two purposes for two groups of traders.
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Companies doing business
internationally commonly make or receive payment in
currencies foreign to their own.
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Thus they must trade foreign currencies and
they engage in Forex options trading
in order to reduce currency risk.
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Currency speculators seek to take advantage of changes in currency
value and may trade currencies directly
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or hedge risk and gain investment leverage by
means of foreign currency options
trading.www.Options-Trading-Education.com
Foreign currencies are traded one versus
another.www.Options-Trading-Education.com
Thus it is not the value of the US dollar or Yen
versus gold or commodities that one
is concerned with in foreign currency options trading.
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It is the relative value of the dollar versus the
Yen.www.Options-Trading-Education.com
Fix Hedge Currency Risk with Futureswww.Options-Trading-Education.com
Here is a quick example.
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A Japanese airline wishes to buy a Boeing
787 Dreamliner.www.Options-Trading-Education.com
Payment will be made in US dollars.
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The plane will cost around $200 million.
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Every one percent change in the value of
the Yen versus the dollar will change the cost of the delivered airline by $2 million.
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In the last few months the USD YEN currency pair has varied by 5%
from high to low.www.Options-Trading-Education.com
That would translate to a difference of $10 million in what the
Japanese airline might have to pay to Boeing.
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There are a couple of ways that the Japanese
airline might use to reduce currency risk.
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The first is to buy currency futures. The
airline will pick a futures contract that will come due around
the time that the airplane will be
delivered.www.Options-Trading-Education.com
They will not need to spend any money with
the futures contract but will obligate themselves
to purchase dollars for YEN at the contract price
on the settlement date.www.Options-Trading-Education.com
This strategy fixes their cost of doing business as of the
expiration dates of their futures contracts but has its drawbacks.
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Rather the company will buy options and on
the options expiration dates
will only need to execute the contracts involved if doing so is
profitable.www.Options-Trading-Education.com
Hedge Currency Risk with Foreign Currency
Options Tradingwww.Options-Trading-Education.com
The better alternative in this situation is to
buy calls or puts on the USD with the YEN.
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When to buy calls is when the trader
believes that the USD will go up in value
versus the YEN by the time that payment is
due.www.Options-Trading-Education.com
When to buy puts is when the trader
believes that the USD will fall in value by the
time in that payment is due.
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If the dollar does, in fact, go up in value the
trader executes the options contractwww.Options-Trading-Education.com
and buys dollars at the strike price of the
contract, the original value of the dollar
versus the Yen.www.Options-Trading-Education.com
As the figures noted above demonstrate, a savings of $10 million
on this sort of contract is possible.
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The trader would only buy puts in this
instance if his company already has money set aside in dollars to pay
for the plane.www.Options-Trading-Education.com
If the dollar plummets in value the trader who has purchased puts on the dollar with the Yen
can simply exit his contract and take the
profit.www.Options-Trading-Education.com
Thus he will have the same benefit is if he
had kept Yen and converted at the time
of payment.www.Options-Trading-Education.com
Speculators can use all of the same techniques
but do so in seeking profit in whichever
currency pair they are trading.
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For more insights and useful information
regarding options and options trading, visit
www.Options-Trading-Education.com
.www.Options-Trading-Education.com