Foreign Currency Options Trading

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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.

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Foreign Currency Options Trading

  1. 1. Foreign Currency Options Trading By www.Options-Trading-Education.com
  2. 2. Foreign currencyoptions trading serves two purposes for two groups of traders. www.Options-Trading-Education.com
  3. 3. Companies doing business internationally commonly make or receive payment incurrencies foreign to their own. www.Options-Trading-Education.com
  4. 4. Thus they must trade foreign currencies and they engage in Forexoptions trading in orderto reduce currency risk. www.Options-Trading-Education.com
  5. 5. Currency speculatorsseek to take advantage of changes in currency value and may trade currencies directly www.Options-Trading-Education.com
  6. 6. or hedge risk and gaininvestment leverage by means of foreign currency options trading. www.Options-Trading-Education.com
  7. 7. Foreign currencies are traded one versus another. www.Options-Trading-Education.com
  8. 8. Thus it is not the valueof the US dollar or Yen versus gold or commodities that one is concerned with in foreign currency options trading. www.Options-Trading-Education.com
  9. 9. It is the relative valueof the dollar versus the Yen. www.Options-Trading-Education.com
  10. 10. Fix Hedge Currency Risk with Futures www.Options-Trading-Education.com
  11. 11. Here is a quick example.www.Options-Trading-Education.com
  12. 12. A Japanese airlinewishes to buy a Boeing 787 Dreamliner. www.Options-Trading-Education.com
  13. 13. Payment will be made in US dollars. www.Options-Trading-Education.com
  14. 14. The plane will costaround $200 million. www.Options-Trading-Education.com
  15. 15. Every one percentchange in the value of the Yen versus thedollar will change the cost of the delivered airline by $2 million. www.Options-Trading-Education.com
  16. 16. In the last few months the USD YEN currency pair has varied by 5% from high to low. www.Options-Trading-Education.com
  17. 17. That would translate to a difference of $10 million in what the Japanese airline might have to pay to Boeing. www.Options-Trading-Education.com
  18. 18. There are a couple ofways that the Japanese airline might use to reduce currency risk. www.Options-Trading-Education.com
  19. 19. The first is to buy currency futures. Theairline will pick a futures contract that will comedue around the time that the airplane will be delivered. www.Options-Trading-Education.com
  20. 20. They will not need to spend any money with the futures contract but will obligate themselves to purchase dollars forYEN at the contract price on the settlement date. www.Options-Trading-Education.com
  21. 21. This strategy fixes their cost of doing business as of the expiration dates of their futures contracts but has its drawbacks. www.Options-Trading-Education.com
  22. 22. Rather the companywill buy options and on the options expirationdates will only need to execute the contracts involved if doing so is profitable. www.Options-Trading-Education.com
  23. 23. Hedge Currency Riskwith Foreign Currency Options Trading www.Options-Trading-Education.com
  24. 24. The better alternative in this situation is tobuy calls or puts on the USD with the YEN. www.Options-Trading-Education.com
  25. 25. When to buy calls is when the traderbelieves that the USD will go up in valueversus the YEN by the time that payment is due. www.Options-Trading-Education.com
  26. 26. When to buy puts is when the trader believes that the USD will fall in value by thetime in that payment is due. www.Options-Trading-Education.com
  27. 27. If the dollar does, infact, go up in value the trader executes the options contract www.Options-Trading-Education.com
  28. 28. and buys dollars at the strike price of the contract, the original value of the dollar versus the Yen. www.Options-Trading-Education.com
  29. 29. As the figures noted above demonstrate, a savings of $10 millionon this sort of contract is possible. www.Options-Trading-Education.com
  30. 30. The trader would only buy puts in thisinstance if his company already has money set aside in dollars to pay for the plane. www.Options-Trading-Education.com
  31. 31. If the dollar plummetsin value the trader who has purchased puts on the dollar with the Yen can simply exit his contract and take the profit. www.Options-Trading-Education.com
  32. 32. Thus he will have the same benefit is if he had kept Yen andconverted at the time of payment. www.Options-Trading-Education.com
  33. 33. Speculators can use allof the same techniques but do so in seeking profit in whichever currency pair they are trading. www.Options-Trading-Education.com
  34. 34. For more insights and useful informationregarding options and options trading, visitwww.Options-Trading- Education.com. www.Options-Trading-Education.com

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