What is foreign exchange option trading?
Foreign exchange option transaction refers to a transaction in which both parties of the transaction buy or sell the right to buy or sell a certain foreign exchange in the future according to agreed conditions and a certain exchange rate. Foreign exchange option trading is a financial innovation in the early and mid-1980s and a new method of foreign exchange risk management.
How to make money in gold speculation experts free guide bank gold and silver TD account opening guide bank gold and silver simulation trading software set gold number desktop market quotation tool In December 1982, foreign exchange options trading was first conducted on the Philadelphia Stock Exchange, followed by the Chicago Mercantile Exchange and Amsterdam The European Options Exchange in Europe, the Montreal Exchange in Canada, and the London International Financial Futures Exchange have successively opened foreign exchange options trading. At present, the Philadelphia Stock Exchange and the Chicago Board Options Exchange are representative foreign exchange options markets in the world. The types of foreign exchange options they operate include British Pound, Swiss Franc, West German Mark, Canadian Dollar, French Franc, etc.
Forex options trading
Foreign exchange options are different from forward foreign exchange contracts, which are obliged to execute the purchase and sale of foreign exchange contracts on the expiry date, while foreign exchange option contracts choose to execute or not execute the contract at the will of the contract holder. The termination date of the contract is called the expiry date. Each option contract specifies the amount of foreign currency traded, expiry date, strike price and option price (insurance premium). According to the contract’s executable date, option transactions are divided into American-style options and European-style options. If the option can be executed before the expiry date, it is called an American option; if it can only be executed on the expiry date, it is called a European option. The agreed exchange rate when the holder of a foreign exchange option executes the purchase or sale of the option on or before the expiry date is called the excercise price or the strike price. The execution price (exchange rate) is determined after selection. This is different from the forward exchange rate. The forward discount or premium is determined by the bank that buys and sells foreign exchange. The purchaser of foreign exchange options pays a fee to the seller, called the option price (option price), or premium (premium).
Regarding the risk management of the foreign exchange futures and options market, the Bank of International Settlements Basel Committee on Banking Supervision, the International Organization of Securities Supervisors (IOSCO), the International Monetary Fund (IMF) and the group of 30 non-governmental organizations have all put forward active and effective suggestions. In the process of establishing and implementing a risk management framework, at least the following steps should be included:
- Clarify the degree of risk you can bear. Starting from objective reality (including financial and psychological factors), set the tolerable risk range. Too large can easily lead to business crisis; too small is not conducive to making full use of corporate assets for value preservation and appreciation.
- Clarify the powers and responsibilities of each governance layer. Achieve equal rights, responsibilities and interests, inspire enterprising, prevent excessive risk-taking behavior, and achieve optimal operation through governance levels and governance ranges.
- Formulate risk management structure. It specifically includes: risk identification, risk measurement, selection of risk management methods, risk control, risk monitoring, and risk reporting and evaluation.
- Ensure that there is sufficient information feedback and public supervision system. The information society needs corresponding information systems, especially for the high-risk futures market. Only with efficient information feedback can it be possible to satisfy the existence of an effective market, promote the rational flow of investors, and realize the interaction between the spot market and the futures market. At the same time, the fairness of market governance also requires public supervision.
- Pay close attention to the dynamics of the international market. At present, there are 7 trillion US dollars of hot money and 16 trillion US dollars of government bonds in the international market, and the implementation of risk management should pay close attention to the concentration of large amounts of funds on high-risk derivatives. Approximately 90% of the global derivatives business is held by a few U.S. commercial banks, such as Morgan Bank, Citibank, Bank of America, and Chase Manhattan Bank. With the increase in off-balance sheet business, no more than 2% of daily derivatives transactions are related to the trade of physical goods, which shows the high concentration of risks.
Profit method of foreign exchange options trading
How can foreign exchange options trading be profitable?
There are two main profit methods for foreign exchange options trading:
- Hedging profit
Speculators buy a certain currency in a real foreign exchange transaction, and at the same time buy put options of the same amount in the options. If the market rises, the real profit and the option lose; if the market falls, the real loss option profit.
The main advantages of hedging profit-making methods are: it can avoid the risk in a single investment product and basically achieve risk-free profit; but the disadvantage is that it requires speculators to have certain investment experience and large investment funds.
- Profit from gambling
Investors must first analyze and judge the future ups and downs of the market. If they feel they want to rise, they buy bullish, and if they feel they want to fall, they buy bearish.
The advantage of this method is that it takes up a small amount of capital and is widely used. Whether it is stock futures or gold and foreign exchange, this method is used by most investors to facilitate mutual exchange of experiences, but the disadvantage is that most investors who use this method basically No profit is possible.