Income Tax Rates

Forex Options are used both by companies as risk management and hedging tools against their foreign exchange exposure and by speculators to make profits. But what are Options? In simple and easy terms, it is a contract traded on the floor of an exchange that gives the buyer the right but no obligation to buy an underlying asset under specific conditions like price and timing on payment of a premium.

The buyer may exercise the right if it makes him/her a profit. He/she may not exercise the right if it is unprofitable. However, if the buyer of an options contract exercises his/her right to buy the underlying asset, the seller is obligated to sell the asset at the specified price.

In all foreign currency transactions, one currency is purchased and another is sold. Consequently, every currency option is both a call and a put option. A call conveys the right to buy the underlying currency at a specified price. A put gives the buyer the right to sell at a predetermined price.

Now, why options are important as a risk management and hedging tool? Lets make it clear with an example. Suppose a Japanese company has to make the payment for its imports of raw material in three months time in US Dollar.

The Japanese company can remain unhedged and purchase USD in prevailing spot rate in 3 months time. It can hedge by buying USD forwards or it can use an options strategy.

One of the hedging strategies available to the Japanese company is to buy JPY put and USD call option. Buying the JPY put option will put a ceiling on the cost of imports in case JPY goes down and depreciates in 3 months. The company limits the cost to a maximum while at the same time not limiting the minimum. You can trade these five exotic options to make profits under different market conditions. In case of a loss, you will only lose the small premium that you had paid while buying these exotic options.

Digital options are inexpensive, simple and easy to trade. If you believe the EUR/USD rate is going to be above 1.0900 after two months but you are not sure about the timing of this move, buy a digital option. If after two months, the EUR.USD rate is indeed above 1.0900, you get your predetermined payoff. If not, your digital option will expire and you with lose only a small premium.

One Touch Options are perfect vehicles for those forex traders who believe that there will be a retracement. The price action of a given currency pair will test a support/resistance level with a false breakout. The one touch options will pay a profit if the market touches the predetermined barrier level. If not, you lose a small premium.

A No Touch Option is a great way that you can use to profit from a trending market. The no touch option pays a profit if the market never touches the barrier level that you choose. All you need to do is to determine the desired payoff, the currency pair that you want to trade, the barrier price and the expiration date of the option.

A Double No Touch Option is perfect for you if you have the successful record of identifying and profiting from breakouts. But you have always lost money when the market is ranging. On the other side, you can use a Double One Touch Option if you know how to pick the tops and bottoms in a ranging market. However, you have always lost in a breakout market.