Trade Exotic Currency Options
Currency Options are used by companies as risk management tools to hedge their foreign exchange exposure and by speculators to make profits. What are Options? In simple terms, it is a trading contract that gives the buyer the right but with no obligation to buy an underlying asset under specific conditions on payment of a premium.
The buyer may or may not exercise the right. However, if the buyer of an options contract exercises his/her right, the seller is obligated to perform.
In every foreign exchange transaction, one currency is purchased and another is sold. Consequently, every currency option is both a call and a put. A call conveys the right to buy the underlying currency. A put gives the buyer the right to sell.
Now, why options are important as a risk management and hedging tool? Lets make it clear with an example. Suppose a Japanese company has to make the payment for its imports of raw material in three months time in US Dollar.
The Japanese company can stay unhedged. It can purchase US Dollar at prevailing spot rate in three months time. On the other hand, it can hedge. Buy 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, easy and inexpensive to trade. If you think, the EUR/USD rate is going to be above 1.0800 after 2 months but you are not sure about the timing of this move taking place within the next two months, buy a digital option. If after 2 months, the EUR/USD rate is indeed above 1.0800, you get your profit. If not, your digital option will expire. You with lose only a small premium that you had to pay while purchasing the digital option.
One Touch Options are perfect for those traders who believe that there will be a retracement and the price of a given currency pair will test a support/resistance level. The one touch options pay a fixed amount if the market touches the predetermined barrier level.
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 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. - 23162
The buyer may or may not exercise the right. However, if the buyer of an options contract exercises his/her right, the seller is obligated to perform.
In every foreign exchange transaction, one currency is purchased and another is sold. Consequently, every currency option is both a call and a put. A call conveys the right to buy the underlying currency. A put gives the buyer the right to sell.
Now, why options are important as a risk management and hedging tool? Lets make it clear with an example. Suppose a Japanese company has to make the payment for its imports of raw material in three months time in US Dollar.
The Japanese company can stay unhedged. It can purchase US Dollar at prevailing spot rate in three months time. On the other hand, it can hedge. Buy 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, easy and inexpensive to trade. If you think, the EUR/USD rate is going to be above 1.0800 after 2 months but you are not sure about the timing of this move taking place within the next two months, buy a digital option. If after 2 months, the EUR/USD rate is indeed above 1.0800, you get your profit. If not, your digital option will expire. You with lose only a small premium that you had to pay while purchasing the digital option.
One Touch Options are perfect for those traders who believe that there will be a retracement and the price of a given currency pair will test a support/resistance level. The one touch options pay a fixed amount if the market touches the predetermined barrier level.
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 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. - 23162
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 @ 1:31 AM
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