EXCHANGE TRADED CURRENCY OPTIONS

Role of Exchange Traded Currency Options in Risk Management

Executive Summary

The paper focuses on the risk management which is discussed in context of exchange traded currency options. These options are standardized exchange contracts as the treatment is similar to the futures contracts. Moreover, from the study, it is found that the risk management is a fundamental activity in any type of investment. In addition to this, it is also vital to understand that risk management should not be used only for the sale of exchange traded currency options, but it should be used for any financial transaction that we want to do. Besides it, selling exchange traded currency options has no more risk than buying shares, the reason of this statement is that the problems takes place when we operate with leverage.

Table of Contents

Introduction5

Literature Review5

Application7

Conclusion12

Role of Exchange Traded Currency Options in Risk Management

Introduction

The study is related to the role of exchange traded currency options in risk management. The exchange traded currency options are standardized exchange contracts, and their treatment is similar futures contracts. For these options is set by the exchange of the contract specifications. At the conclusion of transactions bidders stipulated only the value of the option premium, all other parameters and standards set by the exchange. Published by the stock exchange quotation of the option premium is the average value for this option for a day. In terms of the exchange trade options with different strike prices or dates of execution are different contracts. In stock options clearing house keeps records of participants' positions for each option contract. That is, a bidder can buy a contract, and if he sells the same contract, then the position is closed. Exchange Clearing House is the opposite side of the transaction for each of the option contract.

Literature Review

According to Black and Myron, (1973) the exchange traded options are the European or American style exercise. Most ASX options are American style, this shows that these options are exercisable and can be traded at any time earlier to the day of expiration. The European options that include index options can only be traded on the day of expiration and not earlier. The exchange traded currency option is contracts which involve two parties that gives the buyer that is the taker the authority but not the liability to sell or buy the shares, underlying the options at the predefined price that is the exercise price before or on the pre-determined date. To get hold of the authority, the buyer pays a payment to the seller of the contract (Black and Myron, 1973, 637-654).

However, according to Das, (2006) the exchange traded currency options are options of the financial market stock exchange that gives its holder in the event of a call option (call) the right to receive, in the case of a put option (put) on sale of the option transaction underlying object (underlier) in managing risk. However, this right must not claim the option ...