http://www.Options-Trading-Education.com - Foreign Currency Options Trading - Foreign currency options trading serves two purposes for two groups of traders.
Companies doing business internationally commonly make or receive payment in currencies foreign to their own.
3. Companies doing
business
internationally
commonly make or
receive payment in
currencies foreign to
their own.
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4. Thus they must trade
foreign currencies and
they engage in Forex
options trading in order
to reduce currency risk.
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5. Currency speculators
seek to take advantage
of changes in currency
value and may trade
currencies directly
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6. or hedge risk and gain
investment leverage by
means of foreign
currency options
trading.
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8. Thus it is not the value
of the US dollar or Yen
versus gold or
commodities that one
is concerned with in
foreign currency
options trading.
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9. It is the relative value
of the dollar versus the
Yen.
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13. Payment will be made
in US dollars.
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14. The plane will cost
around $200 million.
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15. Every one percent
change in the value of
the Yen versus the
dollar will change the
cost of the delivered
airline by $2 million.
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16. In the last few months
the USD YEN currency
pair has varied by 5%
from high to low.
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17. That would translate to
a difference of $10
million in what the
Japanese airline might
have to pay to Boeing.
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18. There are a couple of
ways that the Japanese
airline might use to
reduce currency risk.
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19. The first is to buy
currency futures. The
airline will pick a futures
contract that will come
due around the time that
the airplane will be
delivered.
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20. They will not need to
spend any money with
the futures contract but
will obligate themselves
to purchase dollars for
YEN at the contract price
on the settlement date.
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21. This strategy fixes their
cost of doing business
as of the expiration
dates of their futures
contracts but has its
drawbacks.
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22. Rather the company
will buy options and on
the options expiration
dates will only need to
execute the contracts
involved if doing so is
profitable.
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24. The better alternative
in this situation is to
buy calls or puts on the
USD with the YEN.
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25. When to buy calls is
when the trader
believes that the USD
will go up in value
versus the YEN by the
time that payment is
due.
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26. When to buy puts is
when the trader
believes that the USD
will fall in value by the
time in that payment is
due.
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27. If the dollar does, in
fact, go up in value the
trader executes the
options contract
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28. and buys dollars at the
strike price of the
contract, the original
value of the dollar
versus the Yen.
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29. As the figures noted
above demonstrate, a
savings of $10 million
on this sort of contract
is possible.
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30. The trader would only
buy puts in this
instance if his company
already has money set
aside in dollars to pay
for the plane.
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31. If the dollar plummets
in value the trader who
has purchased puts on
the dollar with the Yen
can simply exit his
contract and take the
profit.
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32. Thus he will have the
same benefit is if he
had kept Yen and
converted at the time
of payment.
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33. Speculators can use all
of the same techniques
but do so in seeking
profit in whichever
currency pair they are
trading.
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34. For more insights and
useful information
regarding options and
options trading, visit
www.Options-Trading-
Education.com.
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