Buy Foreign Currency Options
http://www.options-trading-education.com/24056/buy-foreign-currency-options/
The most common reason for businesses to buy foreign currency options is to hedge currency risk in international transactions. In these cases traders confine their trades to the specific currencies to be used in a business transaction. On the other hand speculators buy foreign currency options in search of profits. Each reason to buy foreign currency options dictates options trading strategy.
Hedging Currency Risk
The reason that there is a worldwide set of Forex markets is to facilitate international transactions. When the USA went off of the gold standard in 1971 there was no longer that benchmark to compare values of currencies. The Forex market handles transactions of currencies worth trillions of dollars. In fact roughly eighty-five percent of all transactions involve the US dollar. The Forex market sets a fair value for one currency versus another but that relative value fluctuates with both market fundamentals and ever-varying market consensus. The risk inherent in an international transaction is that the relative value currency of the buyer will fall between the agreement on a contract and time for payment. Companies buy foreign currency options to lock in a price that they will have to pay for the currency in which they will need to make payment upon delivery of a product. They buy call options on the payment currency with their own currency.
Buying Forex Calls to Hedge Risk
As an example, a call contract on the Euro using US dollars gives the purchaser the right to buy Euros with dollars at a set price on or before the expiration date of the options contract. In this case, if the US dollar falls in relation to the Euro the buyer of the call option will execute the contract and buy Euros with dollars at the contract price. If the US dollar rises in price the buyer simply lets the contract expire and uses his now-more-valuable dollars to get a better deal in Euros for his purchase.
Speculating in Currency Options
The old saying is that there is always a profitable market somewhere. Currency speculators look for volatile currency pairs and seek to profit from price changes. As with hedging risk the trader can buy calls on one currency with another but he or she has a wider range of currencies from which to choose. Additionally, a currency speculator has no obligation to pay for a product on any future date. Thus, he or she can simply exit a trade when it shows a profit.
Options Leverage
Speculators often buy currency options because of options trading leverage. As an example...
2. The most common reason for
businesses to buy foreign currency
options is to hedge currency risk in
international transactions.
http://www.options-trading-education.com/24056/buy-
foreign-currency-options/
3. In these cases traders confine their
trades to the specific currencies to be
used in a business transaction.
http://www.options-trading-education.com/24056/buy-
foreign-currency-options/
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5. On the other hand speculators buy
foreign currency options in search of
profits.
http://www.options-trading-education.com/24056/buy-
foreign-currency-options/
6. Each reason to buy foreign currency
options dictates options trading
strategy.
http://www.options-trading-education.com/24056/buy-
foreign-currency-options/
8. The reason that there is a worldwide
set of forex markets is to facilitate
international transactions.
http://www.options-trading-education.com/24056/buy-
foreign-currency-options/
9. When the USA went off of the gold
standard in 1971 there was no longer
that benchmark to compare values of
currencies.
http://www.options-trading-education.com/24056/buy-
foreign-currency-options/
10. The Forex market handles transactions
of currencies worth trillions of dollars.
http://www.options-trading-education.com/24056/buy-
foreign-currency-options/
11. In fact roughly eighty-five percent of all
transactions involve the US dollar.
http://www.options-trading-education.com/24056/buy-
foreign-currency-options/
12. The Forex market sets a fair value for
one currency versus another but that
relative value fluctuates with both
market fundamentals and ever-varying
market consensus.
http://www.options-trading-education.com/24056/buy-
foreign-currency-options/
13. The risk inherent in an international
transaction is that the relative value
currency of the buyer will fall between
the agreement on a contract and time
for payment.
http://www.options-trading-education.com/24056/buy-
foreign-currency-options/
14. Companies buy foreign currency
options to lock in a price that they will
have to pay for the currency in which
they will need to make payment upon
delivery of a product.
http://www.options-trading-education.com/24056/buy-
foreign-currency-options/
15. They buy call options on the payment
currency with their own currency.
http://www.options-trading-education.com/24056/buy-
foreign-currency-options/
16. Buying Forex Calls to
Hedge Risk
http://www.options-trading-education.com/24056/buy-
foreign-currency-options/
17. As an example, a call contract on the
Euro using US dollars gives the
purchaser the right to buy Euros with
dollars at a set price on or before the
expiration date of the options contract.
http://www.options-trading-education.com/24056/buy-
foreign-currency-options/
18. In this case, if the US dollar falls in
relation to the Euro the buyer of the call
option will execute the contract and buy
Euros with dollars at the contract price.
http://www.options-trading-education.com/24056/buy-
foreign-currency-options/
19. If the US dollar rises in price the buyer
simply lets the contract expire and uses
his now-more-valuable dollars to get a
better deal in Euros for his purchase.
http://www.options-trading-education.com/24056/buy-
foreign-currency-options/
21. The old saying is that there is always a
profitable market somewhere.
http://www.options-trading-education.com/24056/buy-
foreign-currency-options/
22. Currency speculators look for volatile
currency pairs and seek to profit from
price changes.
http://www.options-trading-education.com/24056/buy-
foreign-currency-options/
23. As with hedging risk the trader can buy
calls on one currency with another but
he or she has a wider range of
currencies from which to choose.
http://www.options-trading-education.com/24056/buy-
foreign-currency-options/
24. Additionally, a currency speculator has
no obligation to pay for a product on
any future date.
http://www.options-trading-education.com/24056/buy-
foreign-currency-options/
25. Thus, he or she can simply exit a trade
when it shows a profit.
http://www.options-trading-education.com/24056/buy-
foreign-currency-options/
27. Speculators often buy currency options
because of options trading leverage.
http://www.options-trading-education.com/24056/buy-
foreign-currency-options/
28. As an example, a speculator expects
that current Japanese economic and
monetary policy will result in a cheaper
Yen.
http://www.options-trading-education.com/24056/buy-
foreign-currency-options/
29. He or she simply buy US dollars, British
pounds or Euros with Yen and wait.
http://www.options-trading-education.com/24056/buy-
foreign-currency-options/
30. But this ties up his or her currency.
http://www.options-trading-education.com/24056/buy-
foreign-currency-options/
31. So the trader purchases call options on
another currency with the Yen. If
analysis is correct the Yen falls in price
and the trade is profitable.
http://www.options-trading-education.com/24056/buy-
foreign-currency-options/
32. The trader has first of all tied up less
trading capital and his choice to buy
foreign currency options has resulted in
a greater percentage return on
investment.
http://www.options-trading-education.com/24056/buy-
foreign-currency-options/
33. This is the leverage of trading options
on foreign currencies.
http://www.options-trading-education.com/24056/buy-
foreign-currency-options/
