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Read e-book online A Currency Options Primer (The Wiley Finance Series) PDF

By Shani Shamah

A short and concise advisor to forex optionsAn knowing of foreign money suggestions is key for these operating in funding and foreign currency echange. A foreign money thoughts Primer units out to offer readers a transparent advisor to how the forex alternative marketplace capabilities, supplying sensible suggestion on studying the mandatory elements and ideas for absolutely realizing the workings of this industry.

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Additional resources for A Currency Options Primer (The Wiley Finance Series)

Sample text

Currently, the company have contracted to supply 10 million dollars’ worth of goods to America and expect to receive payment in three months’ time, in dollars. The company believes that the dollar will appreciate against the British pound over this three-month period. The company has several alternative strategies: 1. Leave the future cash flow unhedged, as they believe that the exchange rate will move in their favour. 2. Enter into a forward contract to sell dollars and buy sterling in three months’ time.

In this regard, intervention is used as a device to signal a desired exchange rate movement. The second group of banks can best be described as aggressive managers of their reserves. Some of the Middle Eastern and Far Eastern central banks fall into this category. They are major speculative risk takers and their activities often disturb market equilibrium. Along side this activity, the central banks have clients in their own right and they will have commercial transactions to undertake. In certain countries, central banks are involved in local fixing sessions between commercial banks, often acting as an adjudicator to the correct fixing of the daily rates, or to ensure the supply and demand for foreign currency is balanced at a rate in line with its current monetary policy.

The company has several alternative strategies: 1. Leave the future cash flow unhedged, as they believe that the exchange rate will move in their favour. 2. Enter into a forward contract to sell dollars and buy sterling in three months’ time. 3. Purchase a three-month sterling call option (the right to buy sterling and sell dollars). Possible results: 1. If the exchange rate does move in the company’s favour, then the company will receive a windfall profit on their long dollar position. However, this strategy is very dangerous because if the exchange rate moves contrary to their expectations, their sterling profits will be reduced and could become a loss as their costs are fixed in sterling.

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