If your company has international transactions, you might want to hedge against shifts in currency rates. That’s where FX Options come in!
These are European-style options that confer the right but not the obligation to exchange one currency for another at a pre-agreed rate (known as the’strike rate’) on or before a specified date.
Advantages
The use of currency options can help to protect businesses against adverse movements in the foreign exchange market, whilst also allowing them to benefit from favourable moves. A standard FX option is an over the counter (OTC) contract which gives the buyer the right to buy or sell a fixed amount of currency at a previously agreed rate in a given period.
Smart can offer a range of FX options contracts to suit your specific business needs. These can be vanilla options, structured FX options or a combination of both.
The benefits of using FX Options are many and varied. One of the main advantages is that they are a very flexible and cost effective risk management tool.
Risk management
Foreign exchange risk is an increasing concern for businesses of all sizes. Currency valuations are regularly changing and can result in unpredictable income or significant costs.
Fortunately, companies can use FX options to reduce their exposure to these fluctuations. They offer a standardised contract which gives the buyer the right to purchase or sell a certain amount of a foreign currency at a predetermined price and quantity on a specific date in the future.
The process of determining an option strategy for hedging FX risk can be complex and time-consuming. However, many corporates partner with Chatham to manage this process and ensure the strategy is optimised for their company’s unique mix of currency exposures.
Leverage
Forex leverage is a type of margin trading that allows you to increase the size of your positions and make larger profits from small price movements. However, you must be careful with leverage and use a risk management strategy to ensure that your trading account isn’t depleted.
Leverage amplifies your gains, but also increases your losses. Typically, a trader should never use more than 2% of their deposit at any given time, as it can quickly lead to losses.
Hedging
Hedging is the process of offsetting an underlying risk exposure that is subject to possible downside (losses).
Hedging can be used to limit or eliminate a specific risk. It can also be done to protect against unwanted price movements or events.
A typical hedging strategy involves purchasing a derivative to mitigate a particular short-term risk. Hedging strategies can include a variety of different products such as fixed-income securities or interest rate swaps.
Hedging can be useful for both short-term and long-term investors, depending on the individual’s objectives. For example, a short-term investor may be concerned about the possibility of a decline in stock price.
Speculation
Speculation is when people buy or sell assets on the basis of their expected future value. This is a relatively common practice in markets for real estate, currencies, derivatives, fine art, and commodities.
While speculation involves the potential for significant profits, it also comes with a high risk of loss. Therefore, it is important to be careful and ensure you’re putting your money in the right place at the right time.
Speculators play an important role in the market by absorbing surplus risk and injecting much-needed liquidity. Their actions help to stabilize prices and prevent price bubbles from developing in certain asset classes.
