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Trading and Hedging with Currency Options
Currency options can be used to trade foreign exchange and to hedge foreign
exchange risks.
Trading & SpeculationCurrency options offer some unique features to the speculator. Purchasing an option you know that your downside is limited to the premium you invest. Sounds great and it is. However you should also know that the probability of make a profit depends on where the option strike is. If USD/JPY spot is 120.00 and you buy a 1 month 140.00 strike USD Call, the premium will be small but the probability of losing it all is very high. On the other hand if you sell options you receive premium but you also are exposed to unlimited loss if the market moves against your position.
Hedging With OptionsOptions offer some very interesting features for hedging. There are a wide variety of different types of options to match the full spectrum of risks that companies and fund managers inherit as part of their international trade and investment.
It is important that risk managers understand the products they are buying and exactly how they perform under different scenarios. The goal being to negate the existing risks of the business.
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