Choosing Appropriate Currency Options Hedging Strategy to Manage Risk

Currency options are derivative instruments which give the trader an option to purchase but not the obligation to perform a particular transaction in the fundamental currency pair. These options give the trader the flexibility to perform settlement of option or not. These options are one of the excellent tools which are available to hedge any foreign exchange exposure in different FOREX market situations, like unstable, bullish, stagnant and bearish. Besides these options, the binary option is also gaining much popularity as it is much efficient and simple way of trading which can yield maximum profits and enable you earning profits even if the trader is not trained for any trading.

Factors that influence prices of options:

·        Put premium

·        Call premium

·        Time maturity

·        Risk free interest rate

·        Unpredictability

Need for appropriate hedging strategy for currency options:

To supervise and manage forex risk in present conditions is a daunting task and requires choosing different options strategies combination which if applied in these different market situations will provide hedge before any risk:

·        Unstable or stagnant market situations

·        Bullish and Bearish market situations

But without financial infrastructure availability, capital account convertibility along with under-developed financial and banking systems and exchange control restrictions and regulations, these options strategies cannot be efficiently and thoughtfully applied for supervising risks.

Strategies in unstable market situations for import transactions:

Long straddle: Buying of call options and put options at the similar exercise rate and termination date. This strategy is very beneficial in conditions when the market is unstable, however it will result in loss in stagnant market conditions. The hedger can earn when the exchange rates move in various directions.

Strategies in bearish market situations for export transactions:

·        Purchased Put Option: On purchasing put option, when there is appreciation of domestic currency above the strike price, it results in profits however when it depreciates below the strike price, it results in losses.

·        Currency options Greeks: The hedgers measure and apply range of ratios to forecast the price behaviors of options on any change in any one of the fundamental factors.

·        Delta: Calculates the alteration in options premium for an alteration in the spot exchange prices.

·        Gamma: It measures sensitivity of delta, considering the change in spot exchange prices.

·        Theta: It calculates the sensitivity of options considering the termination of time.

·        Vega: It calculates the options sensitivity considering the volatility of fundamental assets.

Be it currency or binary option, there are no secrets for trading in these options as the entire system is very transparent and simple, still one should be cautious and implement the best strategy to maximize the earnings and profits. There are many significant things which the trader needs to consider before engaging in any kind of options. Hopefully this will assist you out and you shall be successful in navigating the stock trading waters by adopting the above measures.