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Discuss the Role of Exchange Traded Currency Options in Risk Management - Essay Example
Finance & Accounting
Pages 9 (2259 words)
Topic: Discuss the role of exchange traded currency options in risk management Institution Affiliation: Date: Contents Trading Currency Options 7 Currency volatilities and the underlying risks 8 Interest rate consideration 9 Hedging with Options-Risk Management Factor 10 Conclusion 11 References 12 Introduction Exchange traded currency options make use of contracts that are standardized, given the specific currency underlying in such exchange transaction…
Over the counter (OTC) transactions are primarily utilized in currency options trade. Leverage is integral to exchange traded currency options. In this regard, returns associated with the resultant transactions are massive. On the same note, such transactions come with a downside of risks. Combining traded currency options with concurrent forex pair enhances locking in of profits. As a result, risks are minimized. Therefore, the role of exchange traded currency options in the management of risks can be evaluated on the degree with which they manage to reduce risks in the underlying transactions and investment activities in the options market. In the view of risk management by the use of exchange traded currency options, foreign exchange rates for different currencies around the world becomes essential to consider. On the same note, it is important to note that different countries have adopted different exchange rate regimes in regard to world currencies. Fixed, flexible or both exchange rate regimes are used by countries around the world. ...
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