Foreign currency derivatives call and put options for dummies

Foreign currency derivatives call and put options for dummies

A currency option is a type of foreign exchange derivative contract that confers to its holder the right, but not the obligation, to engage in a forex transaction. To learn more about forex trading, visit forex for dummies here.In general, buying such an option will allow a trader or hedger to elect to purchase one currency against another in a specified amount by or on a specified date for an up front cost.

For this right, a premium is paid to the seller, the amount of which varies depending on the number of contracts if the option is bought on an exchange, or on the nominal amount of the option if it is done on the over-the-counter market. Currency put options, like other put options, are considered bearish, and indicate a belief on the part of the investor that the currency will decline in value.

By purchasing a currency put option, an investor can ensure a guaranteed return on their currency investment even if the value of the currency falls sharply during the duration of the currency put option contract. Please help improve this article by adding citations to reliable sources. As in the case of call options, put options can be used by MNCs and speculators alike. An American exporter may have account receivables in a foreign currency.

In this case, the exchange rate risk is a possible depreciation of the foreign currency and the MNC would like to hedge against this risk.If you are a speculator, you plan to buy foreign currency at a cheaper price at the future spot market and sell it at a higher price on the put option. As in the case of the call option, your benchmark for exercising the put option foreign currency derivatives call and put options for dummies not is the future spot markeRelated Book International Finance For DummiesBy Ayse EvrenselWhen you sell a call option, you are selling the right to buy foreign currency.

Therefore, you no longer have an option. The buyer of your call option has the option to buy currency from you. In other words, you become the seller of foreign currency.You collect the premium, but need to accommodate the decision of the buyer regarding exercising his option. Of course, you have to sell pesos to the buyer. Exotic OptionsExotic Options can be path dependent or correlation based. Path-dependent options are dependent on the route prices of the underlying asset take through the life of the option (not just the terminal price or rate at maturity).

Bermuda optionThis is a blend between an American and European option where the right to exercise the option early is restricted to certain predetermined dates. Quanto optionPayoff is in a currency other than the currency of the underlying asset (or basket of assets) at predetermined fixed exchange rate. The purpose is to hedge exposure to the asset without being exposed to the currency risk associated with i.

Foreign currency derivatives call and put options for dummies

Foreign derivatives put dummies currency and for call options

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