![]() ![]() One should decide what proportion of risk exposure to hedge, such as 100% of the booked exposure or 50% of the forecasted exposure. The gain from exercising one option is used to partially offset the cost of the other option, thereby reducing the overall cost of the hedge. One option is priced above the current spot price of the target currency, while the other option is priced below the spot price. Two options can be combined to create a cylinder option. This is a useful option when a business needs to acquire foreign currency on a future date (usually to pay an invoice), and the currency is subject to some degree of variability. Currency OptionĪn option gives its owner the right, but not the obligation, to buy or sell an asset at a certain price (known as the strike price), either on or before a specific date. Because only standard amounts are traded, the resulting hedge may only cover a portion of the underlying currency position. The difference is that futures contracts are traded on an exchange, so these contracts are for standard amounts and durations. Futures ContractĪ futures contract is similar in concept to a forward contract, in that a business can enter into a contract to buy or sell currency at a specific price on a future date. ![]() Since this is a custom contract, it can be set to exactly hedge the underlying currency position. By entering into a forward contract, a company can ensure that a definite future liability can be settled at a specific exchange rate. A forward contract is an agreement under which a business agrees to buy a certain amount of foreign currency on a specific future date, and at a predetermined exchange rate. ![]()
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |