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What Is Involved In The Forward And Futures Contracts

     These days, multinational corporations are investing a lot in the forex. These contracts are agreements to buy or sell a given amount of foreign currency at a specified exchange rate at some future date. What is included in these Forward and futures contracts are the right and obligation to deliver at maturity. Large losses might be incurred by companies as the market is unpredictable. Comparing the amount of the original premium paid the amount on the losses on options is lesser.

It is best to know that a contract that allows the holder to purchase or sell a designated quantity of foreign currency at a specified price or exchange rate up to a specified date is actually a foreign exchange option. When a person is interested with the call option he or she can have the right to buy the currency by exercising the option. It is only during the expiration or maturity date that one can use the option for the last time. A strike price is the exchange rate at which the specified foreign currency can be bought or sold.

Holders with the American option will be able to exercise it at any time up to and including its expiration date. What can be exercised only at the expiration date is the European option. When you sell the option you are the option writer while the one who buys it and uses it is the option buyer. It is best to note that right to buy foreign currency or call option is also the right to sell domestic currency or put option.

Buyers have to pay the sellers an option price which is like a premium to be able to get the benefits of the call option. Once the seller gets this payment he must fulfill the obligations specified in the contract at the request of the buyer. It follows that when the expiration passes the value of a call option is determined by the spot exchange rate and the exercise price.

When the spot price will exceed the exercise price this means that the option is said to be in the money. How a holder can earn money is by exercising it at expiration and thereby purchases the sterling at a cheaper price as agreed upon in the option contract instead of in the spot market at a more expensive exchange rate. When spot and exercise prices are the same the option is said to be at the money.

Buying at the exercise price and selling at a higher spot price results in a profit. Ever time the spot price exceeds the exercise price only by an amount equal to the premium paid; a holder is able to break even.

Remember that there are opposite payoffs for buyers and sellers. The bulk of the money the seller will be earning is from the premiums he is paid and whatever the holder will gain they cannot benefit from. If the option expires unexercised, the seller profits by the full amount of the premium. The same profile will be used for other options like buying and selling a put.

The buying a put option pertains to a buyer's right to sell a currency at a fixed price on some future date without the obligation to sell, the buyer can have the chance to make unlimited profits should the underlying currency strengthen and limit loss. What is meant by the break-even point is that pound sterling has appreciated sufficiently enough to compensate for the initial premium paid out. The option to write a put means that the option writer earns the premium, but accepts substantial risk should the pound sterling depreciates.

Article Source:

More expert foreign exchange information is located at send money to new zealand .To keep learning about foreign exchange be sure to check out wire transfer.

Posted on 2010-12-14, By: *

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