Managing currency risk using foreign exchange options by Alan Hicks

By Alan Hicks

Development at the luck of his bestselling foreign currency thoughts, Alan Hicks has produced this new and helpful consultant to using forex ideas for company treasurers and different monetary executives. atmosphere the significant OTC tools in the company’s probability administration framework, he presents an authoritative advisor to the features, merits and makes use of of foreign money strategies within the administration and keep watch over of foreign currency echange possibility. Alan Hicks’ designated event permits him to be aware of the sensible program of thoughts as skilled within the genuine global of foreign currency, illustrated by way of case learn fabric during the publication.

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15 Delta hedging is a theoretical (mathematical) method employed by all banks trading in FX options and this principle can be applied for corporate use as a hedging tool through option replication described in detail in Chapter 8. 22 OPTION CHARACTERISTICS Secondly, selling options to gain the premium i n c o m e c a n b e used in cases w h e r e t h e writer already has t h e underlying c u r r e n c y position and can therefore always make delivery against any potential exercise, t h e socalled 'covered w r i t i n g .

64 being the strike plus or minus total premiums. an instrument o f volatility. W e will return t o t h e straddle and d e s c r i b e m o r e simple option c o m b i n a t i o n s in later chapters. Short options T h e options described so far have b e e n from t h e p e r s p e c t i v e o f t h e buyer, but options may b e sold as well as bought. In t h e c a s e o f seller, t h e m a x i m u m return is the premium o f t h e o p t i o n even though t h e potential F X loss is unlimited. Note that Fig.

Professional transactions take p l a c e in terms o f traded volatility. Whilst there are many sources o f volatility rates - Reuters, Telerate, B l o o m b e r g and t h e like - they are not ( y e t ) published in t h e financial press and, even if t h e y w e r e , o n e would require a pricing system and t h e k n o w l e d g e t o convert t o premiums for value comparison. This is w h e r e this b o o k will b e o f assistance. 30 THE MARKET-PLACE Exchange listed options Options are traded on various e x c h a n g e s around t h e world and these e x c h a n g e listed options form the s e c o n d o f the t w o markets.

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