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. ...
Individuals and investors are termed as risk averse, risk takers or risk neutral. Given this three distinct behaviours, the decision rules taken under each of the three factors depict the role of exchange traded currency options. Literature Review Currency options are hedged to accomplish various desired outcomes that are predetermined by the individual or the company that engages in currency options transactions. The roles of exchange traded currency options in managing risks can be evaluated from two different perspectives. One, prices and rates of exchange in the option market must be assessed for their characteristic risk magnitude. Two, the marginal utility of the individual, investor or the investing company must be assessed for its relevancy in the context of exchange traded currency options. Holton (2003, p. 132) notes that risks that pertain to prices can neither be hedged nor insured. Risks that pertain to exchange rates in the foreign exchange market however, can be hedged. This is done through continued exchange of currencies that can be divided into simpler units that can continuously be handled. In other words, calls and puts therefore become essential in evaluating risk management in the light of exchange traded currency options. Risks associated with foreign exchange dealings are more or less business risks as Lam (2003) notes. Numerous international corporations face unaccountable business risks that do not threaten their daily business aspects, but also the long term operations and performance. The management is accountable for overseeing financial stability. In the light currency options, multinational corporations account for risky business circumstances by engaging in international transactions especially those that involve foreign
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…
Multinational corporations who have denominations in different currencies are largely exposed to foreign exchange risk and they need to eliminate the impact of severe losses due to adverse movements in foreign exchange rates. Various other forms of managing currency risk have been compared with currency futures to determine that which form is the most credible one.
There are various reasons for outsourcing. The company that outsource can be able to reduce the cost of production, acquire modern technology, improve quality of its products, reduce tax, penetrate market quickly and to increase their production capacity (Casale, 2008).
The risk management strategies support price stabilization, the optimization of production capacities, the increase in market transparency, and increased security of distribution quality. In addition, the understanding of the ever changing current market is important as the trader gets to know of the fluctuating market prices of a commodity brought about by changes in currency.
Under the system of Bretton Woods for instance, exchange rates were fixed at levels determined by the government. Since then, however, rates are determined by people selling and buying currencies in the foreign exchange markets. The history of the pound sterling/USD shows that the rate did not change at all between 1949 and 1966.
The recent developments in the field of financial risk management efficaciously stress on the quantitative methods along with their application in reducing financial risks has made way for many insightful analyses. Market deregulation, advances in global trade, and perpetual technological developments has transfigured the financial market-place throughout the past two decades (Comptroller's Handbook, 1997).
While the notes referring to, deals with legal document that compels a borrower to repay a mortgage loan at a specified interest rate for a specific period time, which is also called 'Promissory notes'. Additionally, 'Checks' means a negotiable instrument drawn against deposited funds, to pay a specified amount of money to a specific person upon demand, such like bill of exchange and draft.
It is not that an unexpected increase or decrease in the foreign currency may not be profitable and will always cause a loss.But this entire uncertainty hampers businesses and overall economic growth.Furthermore due to the volatile and unpredictable nature of the forex markets during times of political or economic crisis the forex markets carry a considerable risk for the multinational firms.
The performance of contracts is guaranteed by the clearing house associated with the exchange which eliminates any possibility of default.
In recent years some exchanges have introduced so-called FLEX option contracts which allow investors to tailor certain terms of a contract.
The author states that exchange rate appears in the financial section of newspaper each day. The number of US dollar required purchasing one unit of foreign currency, this is call direct quotation. Direct quotation has a dollar sign in their quotation. The number of foreign currency that can be purchase for one dollar are called indirect quotation.