Why Trade Exotic Currency Options?
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 currency transactions, one currency is purchased and another is sold. So, every currency option is both a call and a put option. A call option conveys the right to buy the underlying currency at a specified price before a certain date. A put gives the buyer the right to sell at a predetermined price before a fixed date.
In your opinion, why options are important as a risk management tool? Lets make it clear. Suppose a Japanese company is going to make the payment for its imports of raw material in three months time in US Dollar.
The Japanese company can remain unhedged and purchase USD in prevailing spot rate in 3 months time. It can hedge by buying USD forwards or it can use an options strategy.
One of the hedging 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 and depreciates in 3 months. The company limits the cost to a maximum while at the same time not limiting the minimum. You can trade these five exotic options to make profits under different market conditions. In case of a loss, you will only lose the small premium that you had paid while buying these exotic options.
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 for those currency traders who believe that there will be a retracement and the price 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.
A No Touch Option is a great way that you can use to profit from a trending market. The no touch option pays a profit 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 that you want to trade, the barrier price and the expiration date of the option.
A Double No Touch Option is perfect for you if you have the successful record of identifying and profiting from breakouts but always lose money when the market is ranging. On the other side, you can use a Double One Touch Option if you know how to pick the tops and bottoms in a ranging market but have always lost in a breakout market. - 23226
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 currency transactions, one currency is purchased and another is sold. So, every currency option is both a call and a put option. A call option conveys the right to buy the underlying currency at a specified price before a certain date. A put gives the buyer the right to sell at a predetermined price before a fixed date.
In your opinion, why options are important as a risk management tool? Lets make it clear. Suppose a Japanese company is going to make the payment for its imports of raw material in three months time in US Dollar.
The Japanese company can remain unhedged and purchase USD in prevailing spot rate in 3 months time. It can hedge by buying USD forwards or it can use an options strategy.
One of the hedging 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 and depreciates in 3 months. The company limits the cost to a maximum while at the same time not limiting the minimum. You can trade these five exotic options to make profits under different market conditions. In case of a loss, you will only lose the small premium that you had paid while buying these exotic options.
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 for those currency traders who believe that there will be a retracement and the price 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.
A No Touch Option is a great way that you can use to profit from a trending market. The no touch option pays a profit 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 that you want to trade, the barrier price and the expiration date of the option.
A Double No Touch Option is perfect for you if you have the successful record of identifying and profiting from breakouts but always lose money when the market is ranging. On the other side, you can use a Double One Touch Option if you know how to pick the tops and bottoms in a ranging market but have always lost in a breakout market. - 23226
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.
posted by X - Men @ 1:17 AM
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