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Showing results for tags 'hedging strategy'.
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A company in the US may decide to pay 20,000 euros monthly to a company in Europe for raw materials at an agreed exchange rate. If at the end of the time interval for the option, the average of the monthly payments is less favourable than the strike price of the option trade, then the US company will receive a payment for the differential from the option issuer.If the average rate is found to be less desirable than the strike price, the hedging party receives the payment of the differential from the option issuer. No payments are made if the average rates are more favourable.
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This is used as a hedging strategy. As an example, if a trader purchased an average price put contract of 1,000 barrels of crude when the product is $70 with a view to benefit from falling prices, and the price on expiration is $63, then the average price put payout will be ($70 - $63) X 1,000 barrels = $7,000 (less commissions payable on the trade. If the price on expiration was say $73, then the payout for the trade is zero.
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This is used as a hedging strategy. As an example, if a trader purchased an average price put contract of 1,000 barrels of crude when the product is $70 with a view to benefit from rising prices, and the price on expiration is $75, then the average price put payout will be ($75 - $70) X 1,000 barrels = $5,000 (less commissions payable on the trade). If the price on expiration was say $67, then the payout for the trade is zero.
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Foreign Exchange Options are often used in Hedging strategies to protect from additional risk for currency positions that are already open. Foreign Exchange Options can help to limit exposure by making potential gains for trades in an opposing direction.
