FX Forward (USDKRW FX Forwards)
- - Forward is the trade that the one party buys or sells a certain amount of foreign currency at the price bilaterally agreed at a specific time in future from the counter party.
ex) Forward selling: make an agreement with the bank for Forward transaction to sell USD1 million at the FX rate of 1,000 Korean Won after 6 months
Forward buying: make an agreement with the bank for Forward transaction to buy USD1 million at the FX rate of 1,000 Korean Won after 6 months - - Forward price is determined by (Spot price + Swap point).
- Swap point is basically determined by the interest rate difference between the two currencies, but it is largely influenced by the demand and supply.
Forward Price (1,000) = Spot Price (1,001.5) + Swap Point (-1.5)
USD/KRW Forwards (based on Import company)
- Gain derived from Forward Hedging is to match exactly with the loss incurred from export contract 100% hedging at the point of 1,000!!
USD/KRW FX Option
USD/KRW Forwards
USD/KRW FX Option
Seller & Buyer
- - Option buyer has a right (not obligation) to buy or sell a certain amount for foreign currency at the price bilaterally agreed, at a specific time in the future.
- - Option seller has a right (not obligation) to buy or sell a certain amount of foreign currency at the price bilaterally agreed, at a specific time in the future.
- Basic terminologies used in FX Option
- - Call: a right to buy a certain amount of foreign currency
- - Put: a right to sell a certain amount of foreign currency
- - Strike Price (K): the price applied when Option buyer play an Option right and buys or sells the foreign currency
- -Premium: Amount that should be paid to the seller by the buyer when he/she buys Option
- - Expiry Date: the date when Option buyer decides to play the Option
- - Delivery Date: the date when the settlement for the amount of two currencies is made after the Option is played. In general, it is the day after 2 business days from the date of Option strike.
Hedging Method Using Standard Options: Gain & Loss at Maturity
Synthetic Forward
Importance of Option
- More diversified hedging strategies compared to those of the Forwards:
- able to develop various products through an appropriate combination of Call & Put Options by synthesizing the market situations of the present and of the predicted in the future.
- Able to predict the market trends in the future through an Option market
