http://www.options-trading-education.com/24170/swiss-franc-forex-options/
Swiss Franc Forex Options
Don’t you wish that you had been on the right side of a Swiss franc Forex options trade when the Swiss Central Bank took the cap off of the Euro franc exchange rate? For those of you who missed the story here is the short version. And this is a lesson in options trading return on investment versus straight trading.
The Swiss Economy and the Swiss Franc
The Swiss franc is often considered the ultimate safe haven currency. The Swiss economy is well managed and the Swiss franc commonly strengthens against other major currencies. So, when economic times are difficult, war threatens or other currencies weaken investors and Forex traders buy Swiss francs. This drives up the value of the franc. Because Switzerland has an export economy they cannot afford to have a currency that is too highly priced or their exports will not be competitive. For the last few years the Swiss Central Bank purchased Euros with francs whenever the Euro weakened below 1.2 to the franc.
Troubles with the Euro Makes a Policy Expensive
The European Union is in danger of falling back into recession. The long delayed remedy will be a quantitative easing stimulus program by which the European Central Bank will purchase government and corporate bonds, drive down interest rates, stimulate business, create jobs and drive down the value of the Euro. The Swiss Central Banks saw this coming and counted the cost. They changed their monetary policy in a heartbeat by stopping all purchases of the Euro. The immediate result was that the Swiss franc traded as much as forty percent higher versus the Euro and then settled back to being worth thirty percent more in Euros than it was the day before.
How Forex Traders Fared
A very popular strategy in Forex options trading had been to assume that the Swiss Central Bank would be purchasing another batch of Euros and that the Euro would go up a little and the franc would fall a little. First let us look at regular Forex trading. Traders typically trade with twenty fold leverage. Thus a trader who was trading $20,000 on margin with twenty fold leverage was really trading $600,000. When the Swiss franc went instantly by more than 30% he or she was in the red $180,000 minus $20,000 = $160,000. Because the trader could not meet this margin call his brokerage house needed to make payment. Several trading houses lost hundreds of millions of dollars and the total set of losses may be in excess of $1 billion. On the other hand a trader who was betting that the franc would rise made a profit of $180,000 in the same situation. Let us compare this to Swiss franc options trading. The worst that the buyer of an options contract will do is lose the premium or cost of the contract. The best that he or she will do is make the same gains as the regular trader minus the premium he pays.
2. Don’t you wish that you had been
on the right side of a Swiss franc
Forex options trade when the
Swiss Central Bank took the cap
off of the Euro franc exchange
rate?
3. For those of you who missed the
story here is the short version.
4. Before We Continue…
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5. And this is a lesson in options
trading return on
investment versus straight
trading.
11. Because Switzerland has an export
economy they cannot afford to
have a currency that is too highly
priced or their exports will not be
competitive.
12. For the last few years the Swiss
Central Bank purchased Euros with
francs whenever the Euro
weakened below 1.2 to the franc.
15. The long delayed remedy will be a
quantitative easing stimulus
program
16. By which the European Central
Bank will purchase government
and corporate bonds, drive down
interest rates, stimulate business,
create jobs and drive down the
value of the Euro.
18. They changed their monetary
policy in a heartbeat by stopping
all purchases of the Euro.
19. The immediate result was that the
Swiss franc traded as much as
forty percent higher versus the
Euro and then settled back to
being worth thirty percent more in
Euros than it was the day before.
21. A very popular strategy in Forex
options trading had been to
assume that the Swiss Central
Bank would be purchasing another
batch of Euros and that the Euro
would go up a little and the franc
would fall a little.
