Market of the currency features
The market of the currency features is a special kind of the unpreventable forward deals, section of which takes not big part of “Forex”. In the basic of the features there are the exchange deals so the feature contract is secondary tool. Its specialties are the fixed timelines of execution and the capacity of the deals. If the unpreventable forward deal (deal with timeline) bigger than the timeline of MAC is executed in any day of the commerce in both countries, the standard capacity of the currency features may be realized only in the third Wednesday of March, June, September and December.
There are lots of advantages of the currency features which make them attractive. They are available for everyone at the market including manual persons. This is the difference between currency features and the MAC which is hidden for separated persons except for the most solvent – because of the capacities they work with. The market of the features is centralized but as effective as MAC. If MAC is decentralized market the trade with features is done in the same building. It expels credit risk as long as The Chicago Mercantile Exchange Clearinghouse is buyer. The CMEC minimizes its own risk wanting the traders with loosing positions to recover sum equal to their lost. The currency features make some new privileges for the traders about that as long as the features are unpreventable forward deals corporations can use them to insure the risk.
Although the MAC and the market of features are connected there are some differences between them giving opportunities for arbitration.
Gaps, capacities and the open interest is the tool of the technical analysis especially effective on the market of features although their usage spreads also on MAC. Thanks to this advantages the features trade attract many participants all the time. The traders that don’t work on the market can learn the feature prices using computers on the Internet. Most popular are the messages of “Bridge”, “Telerate”. “Reuters”, “Bloomberg”.
“Telerate” gives information about the prices of the currency features while in the same time “Reuters” and “Bloomberg” announce them on special pages showing the difference between the features prices and the prices of the spots.
The currency option is a contract between the buyer and the seller giving right to the buyer without making it necessary to receive definite capacity of currency on preliminary contractual price and in earlier fixed term in spite of the price of the currency and apply to the writer obligatory to give to the buyer the currency in fixed term if and whenever the buyer wants to make the option deal.
The currency option is unique trade tool equally adapted for speculation and hedging. The options allow the individual strategy of every participant to adapt to the conditions of the market the individual strategy of every participant which is very important for the serious investor.
Over the prices of the options influence many factors. Despite of spots and forwards, the high and the low volatility can create profitability on the option market.
For someone the options contracts are cheaper tool of the currency commerce. For others options contracts mean bigger safety and exact execution of the stop-loss orders.
The currency options take fast-growing section of the currency market. From April 1998 the options take 55 of the capacity. Biggest center of the options currency is USA followed by Great Britain and Japan. The prices of the options contracts are based and are secondary on the prices of MAC. That’s why the option contract is secondary tool. Options usually are mentioned in connection with strategies for insuring the risk. For traders is typical the delusion about the complex ability and the simplicity of using the options. There is non-understanding of the opportunities of the options.
On the currency market options are possible as available and also as features. From this the trade with them is made either over the counter (OTC) either on centralized feature market. Big part of the currency options, around 81%, is trade OTC. This market is analogical of the spot and the swap market. Corporations can connect to the banks on the phone and the banks trade between each other either directly either using brokers. In this sort of dealing is possible maximum flexibility, all kind of capacities, all kind of currency, all kind of timeline of the contract, every hour. Quantity of the currency can be whole or fraction number and the value of everyone can be estimated in American dollars and in other currencies.
Every currency, not only the one that is available on the feature contracts, can be trade in kind of option. That’s why the traders can operate with the prices of every, even very exotic currency, which they need including price cross. The timeline can be set in every way – from several hours to several years, although mainly the timelines are set oriented to whole numbers – a week, a month, two months and etc. MAC works all the time that’s why trade with options of currency features is possible on every hour.
Commerce with options of currency features gives rights to the buyer but doesn’t apply necessary to own physical currency features. Despite of the features currency contracts for purchasing of currency options it is not necessary to have start money margin. The value of the premium or the price used by the buyer shows his risk.
Following seven main factors show influence on the price of options.
• Price of currency
• Strike/exercise price
• Volatility of the price of the currency
• Interest differential
• Kind of the contract
• Model of the option – American of European
The price of currency is main price forming component and all other factors are analyzed when reviewing this price. The changing of the price of the currency determine the need of using of options and influence on their profitability. The influence of the price of the currency over the options premium depends on the coefficient Delta, named after the first Greek letter used for describing of aspects of factor price forming showing influence on the value of the option.
Delta (D) – this is the first derivative of the model of the price forming of the options (MPO). This index can be examined in 3 aspects:
As change of the price of currency option (PCO) about the change in the price of currency. For example the change of the price of the currency. That’s why if the price of currency rises up with 10%, the price of the option of one currency will rise with 5%.
As hedge ratio of the option about the currency feature, needed for setting neutral hedge. For example in 0.5 are needed 2 options contracts for each of the feature contracts.
As a theoretical or equal deal position. In such approach Delta is part of the currency feature when the buyer on “call” is in position long or the buyer on “put” is in position short. If it is used the same value D=0.5 this will mean that the buyer of the option “put” sells S of the currency feature contract.
Traders can’t be able to guarantee market spot prices of the unpreventable forwards and features leaving temporary the Delta position unheadged for avoiding of the high price of the hedging and the risk of having extremely high volatility, the trader can insure the position of the exit option with other options. Such methods of neutralization of the risk are called Gamma or Delta insurance.
Gamma (G) is known as curvature of the option. This is the second derivative of the MPO and it is the steppe of changing of Delta or sensitivity of Delta. For example option with D=0.5 and G=0.05 must be D=0.55 if the price of the currency rises with one level or D=0.45 if the price falls with one level. Gamma varies between 0 and 100%. As higher the Gamma is, as higher the sensitivity of Delta is. That’s why it can be expedient Gamma to be threat as acceleration of the option about movement of the currencies.
Vega characterizes the influence of the volatility of the premium for the option. Vega characterizes the sensitivity of the theoretical price of the option referred to the change of the volatility. For example Vega= 0.2 causes rise of the premium with 2% for every percent of rising of the volatility and lowing of the premium with 2 % for every percent decrease of the volatility.
The option is sold for a period of time after which comes a date known as expiration date. The buyer that wants to realize option must say this to the publisher during the day or at the end of the expiration date. In other case he releases the publisher from all kind of law duties. Option can’t be realized after the expiration date.
Theta (Q) known as “pay off in time” is used when because of very slow movement of the currency or when such missing theoretical importance of the option is lost.
For example Q=0.2 means lost of 0.02 from the premium for every day when the currency price is not changing. Inner price doesn’t depend on the time but outer does. Paying off in time is rising with drawing up to the expiration date as long as the count of the possible exits in time is lowing down. The influence of the factor over out-of-the-money option is located somewhere in the margins of this interval.
Existing on the currency market bid-offer spreads can make sale of options and trade of unpreventable forwards too expensive. If the option is deep into-the-money the difference of the stakes under review reached during fast execution can rise above the value of the option. If the size of the option is made only by the inner value earlier execution can be preferred.
Having in mind complication of defining factors, calculating the prices of the options is difficult. In the same time when missing a model of price forming trade with options isn’t anything more than little effective gamble game. One of the ideas when forming the prices of the options is concluded in this that it is considered that the purchase of national currency for other currencies on a price X is equal to a option for sale of foreign currencies for self on the same X price. This is how the option “call” in national currency is made in the option “put” in foreign and back.
For prognosticate of the movement of market are used 2 kinds of analysis: fundamental and technical (examination of the graphics of previous changes of the stock prices). Fundamental analysis is based on usage of theoretical model of currency price forming and learning the basic economical and other factors influencing on the exchange rates of foreign currency.