Trading Foreign Currency Options http://www.options-trading-education.com/24036/trading-foreign-currency-options/ There are two reasons for trading foreign currency options. International businesses commonly make or receive payment in currencies foreign to their own. These companies trade foreign currencies and use Forex options trading in order to manage currency risk. Speculators look to take advantage of changes in currency value and may trade currencies directly or hedge risk and gain investment leverage by trading foreign currency options. Foreign currencies are traded one for another. It is, for example, the relative value of the dollar versus the Yen that matters. In trading foreign currency options a trader seeks to hedge risk or gain profit by analyzing the market and buying calls or puts on currency with another. Trading Foreign Currency Options to Hedge Risk A Japanese company wants to buy ten jets from Boeing. The new Dreamliner goes for about $200 million each. Payment will be in US dollars. The company has the money in hand and could simply pay up front. But they would rather have the use of two billion dollars in Yen until delivery when they must complete payment. But, if the Yen is rising in value versus the dollar it is smart to keep the Yen and change to dollars at the latest date possible. This would make the purchase cheaper in Yen. And, if the current Japanese economic strategy of devaluing the Yen works out it will make dollars more expensive and drive up the cost of the jets when paid for in Yen. Trading foreign currency options is common in such a situation. The Japanese company will buy calls on the US dollars with Yen. They will lock in the price that they need to pay to convert Yen to dollars and pay for their ten jets. If the dollar goes up in value versus the Yen they will execute the options contract and save money. If the dollar falls versus the Yen they will let the options contract expire and simply convert their Yen to dollars to pay for the jets and save money. Currency Rate Speculation The leverage of trading options makes this approach to currency trading very attractive. A trade looks for a low priced option contract on a Forex pair. His analysis of both fundamentals and the market tell him that buying calls on one currency with another will be profitable. He purchases the contract and pays a small premium. If he had purchased one currency with another he would have paid significantly more money. When the market moves he can exit the trade without ever owning either currency and pocket his profit. The rate of return on invested trading capital can be significantly better in trading foreign currency options than when buying and selling currencies. And the risk involved is always limited to the price of the options contract.

1. By
www.Options-Trading-
Education.com
Trading Foreign
Currency Options

2. http://www.options-trading-education.com/24036/trading-foreign-
currency-options/
There are two reasons for trading
foreign currency options.

3. http://www.options-trading-education.com/24036/trading-foreign-
currency-options/
International businesses commonly
make or receive payment in currencies
foreign to their own.

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5. http://www.options-trading-education.com/24036/trading-foreign-
currency-options/
These companies trade foreign
currencies and use Forex options
trading in order to manage currency
risk.

6. http://www.options-trading-education.com/24036/trading-foreign-
currency-options/
Speculators look to take advantage of
changes in currency value and may
trade currencies directly or hedge risk
and gain investment leverage by
trading foreign currency options.

7. http://www.options-trading-education.com/24036/trading-foreign-
currency-options/
Foreign currencies are traded one for
another. It is, for example, the relative
value of the dollar versus the Yen that
matters.

8. http://www.options-trading-education.com/24036/trading-foreign-
currency-options/
In trading foreign currency options a
trader seeks to hedge risk or gain profit
by analyzing the market and buying
calls or puts on currency with another.

9. http://www.options-trading-education.com/24036/trading-foreign-
currency-options/
Trading Foreign
Currency Options to
Hedge Risk

10. http://www.options-trading-education.com/24036/trading-foreign-
currency-options/
A Japanese company wants to buy ten
jets from Boeing. The new Dreamliner
goes for about $200 million each.
Payment will be in US dollars.

11. http://www.options-trading-education.com/24036/trading-foreign-
currency-options/
The company has the money in hand
and could simply pay up front.

12. http://www.options-trading-education.com/24036/trading-foreign-
currency-options/
But they would rather have the use of
two billion dollars in Yen until delivery
when they must complete payment.

13. http://www.options-trading-education.com/24036/trading-foreign-
currency-options/
But, if the Yen is rising in value versus
the dollar it is smart to keep the Yen
and change to dollars at the latest date
possible.

14. http://www.options-trading-education.com/24036/trading-foreign-
currency-options/
This would make the purchase
cheaper in Yen.

15. http://www.options-trading-education.com/24036/trading-foreign-
currency-options/
And, if the current Japanese economic
strategy of devaluing the Yen works out
it will make dollars more expensive and
drive up the cost of the jets when paid
for in Yen.

16. http://www.options-trading-education.com/24036/trading-foreign-
currency-options/
Trading foreign currency options is
common in such a situation.

17. http://www.options-trading-education.com/24036/trading-foreign-
currency-options/
The Japanese company will buy calls
on the US dollars with Yen.

18. http://www.options-trading-education.com/24036/trading-foreign-
currency-options/
They will lock in the price that they
need to pay to convert Yen to dollars
and pay for their ten jets.

19. http://www.options-trading-education.com/24036/trading-foreign-
currency-options/
If the dollar goes up in value versus the
Yen they will execute the options
contract and save money.

20. http://www.options-trading-education.com/24036/trading-foreign-
currency-options/
If the dollar falls versus the Yen they
will let the options contract expire and
simply convert their Yen to dollars to
pay for the jets and save money.

21. http://www.options-trading-education.com/24036/trading-foreign-
currency-options/
Currency Rate
Speculation

22. http://www.options-trading-education.com/24036/trading-foreign-
currency-options/
The leverage of trading options makes
this approach to currency trading very
attractive.

23. http://www.options-trading-education.com/24036/trading-foreign-
currency-options/
A trade looks for a low priced option
contract on a Forex pair.

24. http://www.options-trading-education.com/24036/trading-foreign-
currency-options/
His analysis of both fundamentals and
the market tell him that buying calls on
one currency with another will be
profitable.

25. http://www.options-trading-education.com/24036/trading-foreign-
currency-options/
He purchases the contract and pays a
small premium.

26. http://www.options-trading-education.com/24036/trading-foreign-
currency-options/
If he had purchased one currency with
another he would have paid
significantly more money.

27. http://www.options-trading-education.com/24036/trading-foreign-
currency-options/
When the market moves he can exit
the trade without ever owning either
currency and pocket his profit.

28. http://www.options-trading-education.com/24036/trading-foreign-
currency-options/
The rate of return on invested trading
capital can be significantly better in
trading foreign currency options than
when buying and selling currencies.

29. http://www.options-trading-education.com/24036/trading-foreign-
currency-options/
And the risk involved is always limited
to the price of the options contract.

30. http://www.options-trading-education.com/24036/trading-foreign-
currency-options/
Homework Matters

31. http://www.options-trading-education.com/24036/trading-foreign-
currency-options/
Risk in trading foreign currency options
is limited to the cost of an options
premium in the case of buying calls.

32. http://www.options-trading-education.com/24036/trading-foreign-
currency-options/
Risk is greater when selling calls or
puts. The business of writing or selling
options is typically limited to large
trading houses with deep pockets.

33. http://www.options-trading-education.com/24036/trading-foreign-
currency-options/
And no matter how you trade you need
to do both fundamental and technical
analysis of options in order to make the
best trades.

34. http://www.options-trading-education.com/24036/trading-foreign-
currency-options/
And you need to learn to always sit on
your hands when you do not
understand the market.