Forex Investments

Put Option

An option is a contract, which gives the buyer the right to buy or sell foreign currency at a specific price, on or before a specific date. For this, the buyer has to pay to the seller some money, which is called as premium. There is no obligation on the buyer to complete the transaction if the price is not favorable to him.

Whenever a person has an intention to sell foreign currency by paying a premium amount immediately and settling the same on a later date, it is known as a Put Option. Put Option has two parties, one a buyer of a Put Option and other a seller of a Put Option.

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Call Option

Option Trading confers the right on the holder/buyer to buy/sell a specified asset (here foreign currency) on a specific price on or before a specific date but he has no obligation to buy/sell. Seller/Writer has an obligation to fulfill the contract if buyer/holder exercises the option. Whenever a person has an intention to buy foreign currency by paying a premium amount immediately, and settling the same on a later date, it is known as a Call option. Call option has two parties, one a buyer of a Call option and other a seller of a Call option.

Example:

Mr. A is interested in buying a US dollar.

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Calculation of Exchange Rates for Forward Contracts

When computing exchange rates for merchant transactions, the cover or the base rate at which the cover transaction can be undertaken in the Forex market is first computed, thereafter the profit margin as allowed by the Foreign Exchange Dealer’s Association of India (FEDAI) is taken and the rate rounded off as per FEDAI Rule. In case of forward contracts, the procedure is similar except that while computing the base rate, the forward margin has to be appropriately taken.

The forward margin is the extent to which the forward rate for a currency differs from its spot rate against a second currency.

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Currency Call Options and Put Options

Currency Call Options

A currency call option is a contract that gives the buyer the right to buy a foreign currency at a specified price during the prescribed period. Firms buy call options because they anticipate that the spot rate of the underlying currency will appreciate. Currency option trading can take place for hedging or speculation.

  • Hedging: Multinational companies with open positions in foreign currencies can utilize currency call options. For example, suppose that an American firm orders industrial equipment form a Indian company, and its payment is to be made in Indian Rupees upon delivery. An Indian rupee call option call option lacks in the rate at which the U.S
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Comparison and Features of Future and Forward Markets

A Comparison Between Future and Forward Markets

As a common trend and general preference, it is most unlikely that the investors would ever involve in the forward market, it is important to understand some of the attitudes, particularly as a good deal of the literature on pricing futures contracts typically refers to those contracts interchangeably. Specially differences resulting from liquidity, credit risk, margin, taxes and commissions could cause futures and forward contracts not to be priced identically. For example, in dealing with price risk, futures contracts have several advantages of transaction in comparison to forward contracts. Sequential spot contracts, which is also known as spot contracts where the terms of the contract are re negotiated as events unfold, do not inject any certainty into the transaction.… Read the rest

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Spot and Forward Foreign Exchange Rates

There are two types of foreign exchange rates, namely the spot rate and forward rates ruling in the foreign exchange market. The spot rate of exchange refers to the rate or price in terms of home currency payable for spot delivery of a specified type of foreign exchange. The forward rate of exchange refers to the price at which a transaction will be consummated at some specified time in future.

In modern times the system of forward rate of foreign exchange has assumed great importance in affecting the international capital movements and foreign exchange banks play an important role in this respect by matching the purchases and sales of forward exchange on the part of would be importers and would be exporters respectively.… Read the rest

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