Long Dated FX Options
FX or FOREX options are investments in exchange rate contracts using options instruments. Investors use these to hedge their currency rate risk as well as to speculate and profit on the price movement. Long dated options specifically are bets on the price movement of the distant future.
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Foreign Exchange (FX) Market
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The Foreign Exchange (FX) trading market is the largest market in the world with more than $3.5 trillion traded daily. Traders can invest in the cash (spot) market, the futures market with specified transaction dates or the options market, which are options contracts based on futures trading. Traders use these to speculate on the price movement based on technical chart analysis or fundamental economic analysis. These markets also help international companies hedge their currency risk against rapid price movements for sales contracts.
FX Options
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FX options are an instrument that gives the holder the right but not the obligation to buy an underlying currency exchange rate at a given price on a given date. They can be very lucrative if the market moves in the predicted direction, but also have the possibility of going to zero if the market moves the wrong way. The more distant the option, the higher the price because they will be a closer mirror to the underlying currency.
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Long-Dated Options Analysis and Investment
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For long-dated FX options, the analysis is similar to the overall market analysis. For investments several years in the future, traders likely use fundamental analysis to determine the price direction. Traders who have a poor opinion of the European economies may buy put options on the euro. A put option profits when the asset falls so if the trader owned that option during the 2010 European debt crisis, he would have profited substantially. During that period, the euro fell from 1.4 to 1.2 to the U.S. dollar.
Trading FX Options
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FX options traders can use several methods to invest in long dated options. Currently traders can only invest in the upcoming year on exchanges. However, most large investment banks provide an over-the-counter market to invest in these products. While the fees may be higher, these banks can create a market to match buyers and sellers of these contracts over a several year time period.
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References
- Photo Credit currencies market image by luka from Fotolia.com
