StudentShare solutions
Triangle menu

Currency Derivatives - Essay Example

Not dowloaded yet

Extract of sample
Currency Derivatives

Forwards are quite common in commodities, and can be used either for speculation or for hedging.
Eg: If a person has an order to ship 10000 tons of steel for a period of 6 months at a prefixed price of $1000 per ton. And the person is expecting the price of steel to increase. So, to hedge against the price risk, the person enters into a forward purchase agreement, for 10000 tons 6 months hence. The person position is now fully hedged: if the price of steel increases as expected, person will either claim a delivery from the forward seller, or a net settlement. If the price comes down, person will be obliged to settle by making a payment for the price difference to the forward seller, but will be fully compensated by the pre-fixed price it gets from its own forward sale contract.
2. Options have an asymmetric return profile: an option is an option with one party. The option will be exercised only when the purchaser of the option is in-the-money. Therefore, the only loss in an option is the cost of writing and carrying the option. Hence, options have an asymmetric return profile. On the other hand, the option-seller only makes returns by way of fees or premium for selling the option, against which the person takes the risk of being out-of-money. If the option is not exercised, person makes fees, but if the option is exercised, considerably, the person may lose.
For example, if one person is holding a security of $1000 buys an option to put the security at its current price with some other person. Now if the price of the security goes down to $900. The person may exercise to sell the option of the security to some other person at the agreed price of $1000 to protect against the loss of account of turn down in the market value. If, on the other hand, the price of the security is increased to $1100, the person is out of the money and exercising the option of selling the security does not yield any gain at a price of $1000 as agreed. Therefore, the person will not exercise the option. In other words, the option buyer can only get paid and will not in a position of loss.
2. Compare the pay-off profiles of an open position and a forward contract with the pay-off profile of an option. Demonstrate that, on an ex post basis, a currency option is always second best.
A. The most popular derivatives instruments are forwards, future and option. The Forward contract obligate the buyer to purchase an asset at the pre agreed price where as seller can sell the asset at the exercising price. This is not standardized one. These represent the trade over the counter. The buyer and seller discuss about the contract, which yields to flexibility. This flexibility leads to liquidity of price. If any party wants to get out of agreement, they must find another party, who is willing to purchase that contract. In forward contract during the contract and at the time of forming the contract, no payments will be prepared; the value of contract is realized only at ...Show more


Q. Currency derivatives can be classified into instruments with symmetrical (fixed) and asymmetrical (open) outcomes. Define their respective characteristics, and use examples to illustrate your answer.
A. The currency derivative is a financial instrument which is a contract, characterized by different types of products like, forward, future, option, and swap…
Author : fconn
Currency Derivatives essay example
Read Text Preview
Save Your Time for More Important Things
Let us write or edit the essay on your topic
"Currency Derivatives"
with a personal 20% discount.
Grab the best paper

Related Essays

Are the Risks of Derivatives Manageable
Abstract In this paper the manageability of risks of derivatives as per the given text is discussed and evaluated. Derivatives are financial instruments (contracts / agreements) which become exercisable on the happening or non happening of any specific event.
5 pages (1250 words) Essay
Development of Energy Derivatives in Risk Management
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).
8 pages (2000 words) Essay
International Business - Foreign Currency
For example, if the FC appreciates before the liability is settled, the company has to pay more dollars to purchase the FC needed to settle this liability. As a result, the company will experience a foreign exchange loss. Conversely, a company with a liability position in a weakening FC will experience a foreign exchange gain between the date the liability is incurred and its settlement.
10 pages (2500 words) Essay
Currency Hedging
This literature review would examine the theoretical and conceptual constructs of currency hedging strategies and their relevance or irrelevance to all firms in a highly competitive and risk prone money market. In the first instance currency hedging practices have their relative individual significance vis--vis non-currency investment opportunities and net returns on such investment vehicles (Zarin, & Zimmerman, 2006).
22 pages (5500 words) Essay
Foreign Exchange Risk
Manufacturing operations in a country with highly unstable foreign exchange is ultimately exposed to foreign exchange risk. The depreciation or appreciation of exchange rate in any of the two countries, the domestic as well as international market, would have a significant impact on the firm's revenues and future cash flows.
6 pages (1500 words) Essay
1.Currency derivatives can be classified into instruments with symmetrical(fixed)and asymmetrical(open) outcomes.Define their respective characteristics, and use examples to illustrate your answer
The basic characteristics features of these instruments include, 1. A return from a contract or investment is said to be symmetric when it gives either a profit or loss. Returns from forwards
2 pages (500 words) Essay
Research Methods
As a result, the company will experience a foreign exchange loss. Conversely, a company with a liability position in a weakening FC
12 pages (3000 words) Essay
This research paper will explore the various financial instruments that the companies use for hedging their overseas exposure. The annual reports of various companies will be analysed in
8 pages (2000 words) Essay
In implementing the hedge I would use the buy positions or the long positions that could be covered by a sell position in the futures. Then, I would look for greater correlations between the buy and sell positions that would enable
2 pages (500 words) Essay
Financial derivatives
s research paper discusses how Financial Derivatives is used as an instrument to hedge financial risk such as foreign exchange and also for speculative purposes (, 2014). Common underlying assets include currency exchange rates, market indexes, interest rates, bonds,
3 pages (750 words) Essay
Get a custom paper written
by a pro under your requirements!
Win a special DISCOUNT!
Put in your e-mail and click the button with your lucky finger
Your email
Comments (0)
Rate this paper:
Thank you! Your comment has been sent and will be posted after moderation