Questions On Options And 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

Hedging is a significant measure of financial risk management. Since the 1970s, the increasing number of powerful companies started to control the risk of the exchange rate, the interest rate and commodity by using financial derivatives. ISDA (2013) based on the Global 500 Annual Report 2012 survey found that 88 percent of companies use foreign exchange derivatives. Modigliani & Miller (1958) believed that if the financial markets were under perfect conditions, for instance, there was no agency costs, asymmetric information, taxes and transaction costs, hedging would not increase the company 's value because investors can hedge by themselves. However, a large number of practical studies have shown that hedging is beneficial

The market for swap exists since it allows parties to access market which they might not be able to do directly. Also swaps are customizable between parties and so are more flexible. The duration of

A. the short-term movement of funds from one currency to another in the hopes of profiting from shifts in

(a) An option's value is determined by its exercise value, which is the market price of the stock less its striking price. Thus, an option can't sell for more than its exercise value.

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

For interest rate hedging strategy, swaps are used to hedge. And most importantly, interest rate swaps are an agreement between two counterparties exchanging one stream of future interest payments for another. Interest rate swaps can exchange a fixed payment for a floating payment or vice versa. We can also hedge against commodity price risk where this involves purchase of a futures contract, that guarantee a particular price at a certain point in time. In this case, the price is guaranteed and no unexpected loss can occur. Also no gain based on favorable price changes can occur as well. We can also hedge against commodity price risk where this involves purchase of a futures contract, that guarantee a particular price at a certain point in time. In this case, the price is guaranteed and no unexpected loss can occur. Also no gain based on favorable price changes can occur as well. Hedging against investment risk means strategically using instruments in the market to

Derivative contracts were either negotiated with specific counterparties (over-the-counter) or were standardized contracts executed and traded on an exchange. Negotiated over-the-counter derivatives were comprised of forwards, swaps, and specialized options contracts. Over the counter derivatives can be tailored to meet the customers’ needs with respect to time and quantity and they are not traded in an organized exchange. On the other hand, standardized exchange-traded derivatives consisted of futures and options contracts. Even though over-the-counter derivatives were usually not traded like securities in an exchange, they might be terminated or assigned to an alternative counterparty. Standardized derivatives trade on an exchange and have time and quantity that are fixed.

1. Write the six questions of the Wise Choice Process and answer each one as it relates to your situation

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

Swaps in simple language means, the act of exchanging one thing for another. In financial terms it means an agreement in which two parties agree to exchange series cash flows at some future times according to terms stated in the agreement (Chance and Brooks 2012). They are derivatives because their value is ascertained from some other financial instrument, such as a loan or bond. Swaps are generally priced based on a notional value, which is the dol¬lar value of a contract. The most common type of swap is the interest rate swap in which the two parties agree to enter into an agreement which involve the exchange of payments of fixed rate interest for the payments of floating rate interest or vice versa in the same currency calculated by reference to a mutually agreed notional

Purchasing options, forward, or future contracts. In this way the bank can reduce the uncertainty in the future by entering into an agreement with set terms for a specific date. Thus, if the interest rate moves in an unfavorable direction, the bank has the option to use these tools in order to mitigate the impact of the change on its balance sheet.

Hedging can be defined as a risk management mechanism or strategy which is used to prevent the chances of incurring losses which arise as a result of fall in prices commodities or currencies. It is a technique which is majorly used by the investors in protecting their capital against the effects of the economic situations such as inflation whereby the investors invests in the high yield financial instruments or take a position to cushion them against such effects (Investopedia, 2012).

Unlike to interest rate options (for the buyer option) FRAs are binding agreements that must be settled at the settlement date.

Furthermore it is possible to buy and sell European option contracts, an option gave the holder the right to buy or sell the underlying futures contract at a predetermined price.