Foreign Exchange Markets and Transactions Essay Example | Topics and Well Written Essays - 500 words

Foreign Exchange Markets and Transactions - Essay Example A person who undertakes call option gets right to buy a specific currency but at the same time the person does not come under the obligation to buy it. One needs to pay some premium to buy call option. Paying small premium to get unlimited profit is the most lucrative aspect of working in the derivative options. If the rates are not favorable, the person can let the opportunity go away without exercising his or her right. The person loses only the amount that they paid toward call option. Same is applicable with put option wherein the person has right to sell the currency but again not obliged to sell. Not only this, but the person can choose from the available range of strike rates that are associated with varied premium rates. After all, it is one’s judgmental ability that decides about the most appropriate strike rate to enter into a contract. It is important to note here that the contract of options can be bought in a specified standard volume. In order to get profit from the call option, the price has to move above the strike price plus the premium paid to buy the call. Similarly, in the put option, the price has to move below the strike price plus the premium paid to buy the put option. It is noteworthy that the currency exchange offers opportunity both the ways whether they appreciate or depreciate. When an MMC from the US is interested in doing business in Japan, it is obvious that the MNC will receive all its payments in Japanese Yen. In the long run, the objective of the MNC would be to repatriate surplus funds back to its headquarter on the prevailing exchange rate. The current rates between yen and dollar are: Further, it is likely that the MNC does not remit profit now but only after a few months when Japanese yen would have depreciated against the US dollar. That means every Japanese yen will have now fewer dollars. Contrary to this, if the US