Currency Options are used by companies as risk management tools. What are Options? Simply stated, it is a contract that gives the buyer the right but not the obligation to buy an underlying asset under specific conditions on payment of a premium.
The buyer may exercise the right to buy/sell the underlying asset if it makes a profit. On the other hand, the buyer may not exercise the right if it is unprofitable. However, if the buyer of an options contract exercises the right to buy/sell the underlying asset, the seller is obligated to sell/buy the asset at the specified price.
In all foreign currency transactions, one currency is purchased and another is sold. Consequently, every currency option is both a call and a put option. A call conveys the right to buy the underlying currency at a specified price. A put gives the buyer the right to sell at a predetermined price.
Why options are important as a risk management tool. Suppose a Japanese company is going to make the payment for its import of raw materials in 3 months time in USD.
The Japanese company can stay unhedged and purchase US Dollar in prevailing spot rate in three months time. On the other hand, it can hedge by buying USD forwards or it can use an options strategy.
One of the strategies available to the Japanese company is to buy JPY put and USD call option. Buying the JPY put option will put a ceiling on the cost of imports in case JPY goes down. The company limits the cost to a maximum at the same time not limiting the minimum. You can trade these exotic options to make profits under different market conditions.
Digital options are simple and inexpensive. If you believe the EUR/USD rate is going to be above 1.0900 after two months, buy a digital option if you are not sure when this will happen. If after two months, the EUR.USD rate is indeed above 1.0900, you can earn your predetermined payoff. If not, your digital option will expire with a loss of a small premium.
One Touch Options are perfect vehicles for those forex traders who believe that there will be a retracement. The price action of a given currency pair will test a support/resistance level with a false breakout. The one touch options will pay a profit if the market touches the predetermined barrier level. If not, you lose a small premium.
A No Touch Option is a great way to profit from a trending market. The no touch option pays a fixed amount if the market never touches the barrier level that you choose. All you need to do is to determine the desired payoff, the currency pair, the barrier price and the expiration date.
A Double No Touch Option is perfect for you if you have the track record of identifying and profiting from breakouts but always lose money in a ranging market. On the other hand, you can use a Double One Touch Option if you know how to pick the tops and bottoms in a ranging market but always lose in a breakout market. - 26221
The buyer may exercise the right to buy/sell the underlying asset if it makes a profit. On the other hand, the buyer may not exercise the right if it is unprofitable. However, if the buyer of an options contract exercises the right to buy/sell the underlying asset, the seller is obligated to sell/buy the asset at the specified price.
In all foreign currency transactions, one currency is purchased and another is sold. Consequently, every currency option is both a call and a put option. A call conveys the right to buy the underlying currency at a specified price. A put gives the buyer the right to sell at a predetermined price.
Why options are important as a risk management tool. Suppose a Japanese company is going to make the payment for its import of raw materials in 3 months time in USD.
The Japanese company can stay unhedged and purchase US Dollar in prevailing spot rate in three months time. On the other hand, it can hedge by buying USD forwards or it can use an options strategy.
One of the strategies available to the Japanese company is to buy JPY put and USD call option. Buying the JPY put option will put a ceiling on the cost of imports in case JPY goes down. The company limits the cost to a maximum at the same time not limiting the minimum. You can trade these exotic options to make profits under different market conditions.
Digital options are simple and inexpensive. If you believe the EUR/USD rate is going to be above 1.0900 after two months, buy a digital option if you are not sure when this will happen. If after two months, the EUR.USD rate is indeed above 1.0900, you can earn your predetermined payoff. If not, your digital option will expire with a loss of a small premium.
One Touch Options are perfect vehicles for those forex traders who believe that there will be a retracement. The price action of a given currency pair will test a support/resistance level with a false breakout. The one touch options will pay a profit if the market touches the predetermined barrier level. If not, you lose a small premium.
A No Touch Option is a great way to profit from a trending market. The no touch option pays a fixed amount if the market never touches the barrier level that you choose. All you need to do is to determine the desired payoff, the currency pair, the barrier price and the expiration date.
A Double No Touch Option is perfect for you if you have the track record of identifying and profiting from breakouts but always lose money in a ranging market. On the other hand, you can use a Double One Touch Option if you know how to pick the tops and bottoms in a ranging market but always lose in a breakout market. - 26221
About the Author:
Mr. Ahmad Hassam is a Harvard University Graduate. He is interested in day trading and swing trading stocks and currencies. Learn Forex Nitty Gritty. Discover A Revolutionary New Forex Robot. Develop your own Forex Trading System.
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