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War in Gaza - Forex Options
There is war in Gaza again. And for those who do business internationally it is time to buy foreign currency options to hedge currency risk. The Middle East seems to continually be at war or the center of political and social unrest. Such is the case again as the Israeli military invades Gaza to destroy missiles, supplies and the extensive tunnel system that Hamas has set up to operate out of site of Israeli drones and to enter Israel itself. Hundreds have died and there is no clear end in sight. An added factor this time around is the discovery of huge natural gas reserves under the deep water of the eastern Mediterranean. Local currencies are at risk, as well as international currencies, as fighting in the Middle East always threatens energy supplies and shipping through the Suez Canal. Now, in fact, international flights to Tel Aviv have been cut off due to the threat of missile strikes from Hamas close to the Tel Aviv airport. Due to war in Gaza Forex options are the order of the day for international currency trading.
Hedging Currency Risk
Hedging risk with options is standard practice, especially for those who deal in volatile currencies. For example, US company buying machine parts from a German company will need to pay in Euros, no matter what the exchange rate. The only risk the company sees is a change of the exchange rate between signing a business contract and payment for receipt of the product. The company already has the cash or credit to make payment and there is typically no leverage involved. The company buys calls on the Euro with dollars and locks in how much they will have to pay in dollars as they will execute the contract if the price of Euros in dollars goes up. If the dollar rallies they will let the contract expire and simply use their now-more-valuable dollars to buy Euros. This is standard practice. Now with war in Gaza the nations in the region are most at risk for loss of value of their currencies. However, the European Union gets a large share of its energy from the Middle East and could be hurt by continued or wider spread fighting. Due to the war in Gaza Forex options will be a wise means of containing currency risk.
Speculating on Forex Rates
Not all Forex trading is by those who need to exchange currencies for international business. Currency speculators take advantage of swings in currency values and trade when currency pairs are volatile.