Advantages And Disadvantages Of Using Currency Options

The Balance of Payments in India mainly relies on services exports, remittances and the course capital flows, both foreign direct investments (FDI) and FII. It is very essential that all market participants, such as banks and other intermediaries be provided with the wherewithal so that they can undertake a risk management in a way that is scientific. One of the ways to access domestic, foreign exchange markets is to hedge on the underlying foreign exchange exposures. In addition, the facilities that are available as the booking of forward contracts were included in the domestic forex market in order to evolve and acquire volumes and depth (Sumanth, 2012). Some of the newer hedging instruments have put in place swaps and options in the

Another way to hedge against foreign exchange risk is by applying currency swaps. A currency swap involves two parties that exchange the principal and interest payable on it with one another in order to gain exposure to a desired currency (Tewari, 2013).

3. In light of the various other techniques for hedging currency exposures why the market for currency swap does exists? Who benefits and who looses in such an agreement? Can a swap really create value for a corporation? And if so where does the value come from? What risks does the swap carry for the various parties involved?

The presentation was scheduled for the first week of December 1990. Mr. Pross outlined the use of various derivatives, noting that they differed widely in their ability to reduce risk. If the company was, say, placing a large bid to buy a building abroad, one might prefer to use foreign currency options to hedge the currency risk in the event the deal fell through. He argued, however, that foreign currency futures were best suited to hedge the fluctuations in revenues arising from currency movements. Mr. Pross proposed a plan to hedge currency risk using futures which

lower the value of the dollar because the U.S. will be a less attractive place to invest in

When we look at the exchange rate against the USD from 2012 to 2015, there is decreasing trend. This shows that the value of AUD is declining. This is determined by demand and supply of AUD in the market.

Introduction: What factors affect the demand and supply of Australian dollars in the foreign exchange markets? Distinguish between the possible causes and effects of currency depreciation and a currency appreciation on the Australian economy. What forces have come into play, if any, in the past four months that have affected the value of the Australian dollar?

The United States should pursue and implement policies that are export oriented and keep the dollar relatively undervalued. Right now, there is much controversy over whether or not the U.S. should pursue a strong or weak dollar. It is important to note this controversy because exchange-rate policies are fueled by interest groups who are seeking to advance their economic statuses. An exchange rate is the price of one currency in comparison to another, and are determined by supply and demand. The determination of how much a dollar can appreciate or depreciate is political decision set forth by government. However, government is vulnerable and accountable to the competing pressures of interest groups. Ultimately, the opposing groups have different policies that will advance their economic gain, these policies are directly contradictory and are dependent on the value of the dollar.

The starting point of any foreign exchange risk management plan is to identify the exchange exposure faced. In controlling the foreign exchange risk, currency options have attained acceptance as very helpful tools due to their exclusive nature. They are very critical and convey a much wider range of hedging alternatives. Call options provide the right to the buyer to purchase the

Hull J C. Optionsfuturesand other derivatives seurities.3rd ed. Upper Saddle River: Prentice-Hall199749-141Brealey R, Kaplanis E. Discrete exchange rate hedging strategies. Journal of Banking and Finance, 1995, 19:765-784(Briys E, Solnik B. Optimal currency hedging

* Currency exposure is the extent to which the future cash flows of an enterprise, arising from domestic and foreign currency denominated transactions involving assets and liabilities, and generating revenues and expenses, are susceptible to variations in foreign currency exchange rates.

dollar to devaluate, which means the deliberate downward adjustment in the exchange rate because it is too high compared to China’s yuan and Germany’s euro. However, the tactics and policies President Trump is trying to introduce are causing it to revaluate or change upward in currency’s value. Investors are still investing in the dollar because they see less translation risk, or the impact of exchange rate changes on a firm’s consolidated financial statements, because Trump’s planned policies have a good chance of increasing the dollar. The high U.S. dollar will cause domestic manufacturing costs to increase causing less product demand from foreign countries. This economic risk, which is the extent to which a firm’s future international earning power is affected by changes in exchange rates, will cause job loss because companies will not be able to pay workers the same with raised

Then, we took into consideration only a fluctuation of the exchange rate. The scenarios that we analyzed covers different positions of the dollar against the euro: weak dollar (USD 1,48/EUR), stable dollar (USD 1,22/EUR) and strong dollar (USD 1,01/EUR). Different coverage of costs with hedging was also introduced in the analysis. The three main policies are of not hedging, 100% hedging with forward contracts and 100% hedging with options.

Advantage: FX options have an open market with easy access. The most important thing is that option is a right, rather than an obligation, which can keep Disney from the potential risks that will be induced by future or forward.

Great Eastern Toys is a company in Hong Kong that exports a huge percent of its total sales to the North American and European markets and hence is exposed to currency risk. Previously, the company was occupied with expanding their business and the company 's management had never given much attention to currency risk until their recent meeting with their banker. The banker pointed out that the depreciation of the European currencies during the previous two years had resulted in a substantial loss of income. The company 's management was indeed convinced that they should begin to devote more time and manage their currency position. In this report, we are going to explore the different options for Great Eastern Toys to hedge