Managing Currency Risk Using Foreign Exchange Options is a comprehensive discussion of useful strategies and techniques for using foreign exchange options to manage currency risk. It is focused specifically on the needs of financial executives and corporate treasurers who are charged with managing currency risk for their business organizations. Among the many such books and manuals available, this is one of the very best to be found anywhere for information about how and why business organizations should pay attention to the foreign currency exchange market.
Overview and structure of Managing Currency Risk Using Foreign Exchange Options
Managing Currency Risk Using Foreign Exchange Options is a well rounded work, containing a wealth of practical and real world tested information that every corporate treasurer and financial executive will find immensely useful. Many corporate professionals are reluctant to engage in hedging as a technique for managing risk on the foreign currency exchange market in fear of experiencing significant losses compared to competitors who do not engage in hedging. This book addresses those concerns head on, taking a comprehensive and step by step approach to showing the reader how foreign exchange options can help corporations manage currency risk and still benefit when foreign exchange currency rates shift.
All of this valuable information is structured in a way that lays the foundation for basic understanding and then builds more layers of understanding on to that sturdy foundation. The reader is introduced to the basics of the foreign currency exchange market and its various financial tools and instruments, followed by more specific discussions of particular aspects of foreign exchange options and how they can benefit corporate entities. These specific discussions are included throughout the book in the form of real world case studies, an excellent technique for bringing the information to life for the reader.
Key topics covered in the book
Managing Currency Risk Using Foreign Exchange Options covers a broad range of important topics related to how corporate treasurers and financial executive can better manage currency risk with the appropriate use of foreign currency exchange options. Let’s take a closer look at some of the key subjects contained in the book:
- History and background of foreign exchange options – This part discusses the launch and growth of the over the counter market (also known as the interbank market) and the simple option structures that were in place in the early days. It then delves into new arrivals on the foreign currency exchange market known as exotics and discusses how and why corporate entities became aware of and interested in using these new tools to manage currency risk. Finally, there is a good and clear discussion of how options are supervised and regulated, as well as the conditions and terms that govern currency options.
- Basic concepts of currency exchange and options – This part defines and explains the basic concepts of the foreign currency exchange market and currency options, including the specific definition of a currency option; premiums; face value; put and call; exercise; expiry or maturity time and date; option style; strike price; and intrinsic value of currency options.
- Key characteristics of currency options – This part defines and describes some of the most important characteristics of currency options, such as FX position, long call and long put, bought call and bought put, straddle involving put and call together, short options, underlying positions, and the interim value of currency options.
- The currency option marketplace – This part is an excellent discussion of the structure and operation of the two major ways to trade in foreign currency options – over the counter options and exchange listed options. It also contains a very nice comparison of the two, showing very clearly how they differ as well as the relative advantages and disadvantages of each.
- Call and put parity – This part delves into the concept and structure of call and put parity, including discussions of several synthetic positions and interim values. It also contains a very good real world example of call and put parity.
- Pricing of currency options – This part is an in depth discussion of currency options pricing and the various mathematical models used by traders and analysts. Particular areas of emphasis include Black-Scholes, pricing input factors, volatility, price components, intrinsic value, time value, and components of time value. It goes on to thoroughly explain more about timed value effects, such as non-linear nature and OTM/ITM options vs. ATM, and finishes with solid information about adjusting time value through volatility as well as pricing systems, terms, and summary.
More important topics from Managing Currency Risk Using Foreign Exchange Options
The list of important topics covered in Managing Currency Risk Using Foreign Exchange Options is extensive, as you can see. Here are some more examples of what you will find inside this book:
- The use of options as a hedging tool – This part begins to get at the real heart of using foreign currency options as a tool for currency risk management. It covers the details of puts and calls; selling option; reversal of risk; forward participation; seagulls; strategy design and creation; and manipulation of risk in various circumstances and situations.
- The delta and replication of options – This part delves into the intricacies of the delta, followed by good discussion about hedging with the delta as well as option replication.
- Market practices of OTC – This part is a detailed discussion and description of volatility quoting, the exercise procedure, the corporate market, and other common practices. It also offers some excellent insights and techniques for using volatility as a way to compare quotes.
- Key bank relationships – This part discusses the importance of some of the key bank relationships formed by corporate treasurers and financial executives. It is unique among other books on the topic of risk management using foreign currency options, and proves quite useful in the real world. Two important bank relationships discussed are with the salesperson and the dealer; additional emphasis is placed on understanding that price is not the only thing that matters and how to establish and maintain productive and good relationships.
- Hedging with currency options – This topic is covered in two parts, divided into intermediate activities and advanced activities. Both are comprehensive and well written, with information about such things as compound options, average rate options, basket options, exotic options, the digital option, and much more.
- Controlling risk – This part contains an excellent discussion of the key techniques and strategies available for controlling risk, including information about options and their interim values; simulations of risk scenarios; and software systems to assist with these processes.
- Currency options documentation – This part covers in great deal the various documentation records and requirements in the foreign currency exchange market. It includes a brief history of how key terms and conditions developed, common preferences for terms and conditions, and a discussion of master agreements. There is also a good discussion of broader documentation associated with market-wide agreements, such as the International Currency Options Market Terms from 1997 and various addendums to this important document.
- Counterparty credit risk – This part focuses on the background of and issues surrounding counterparty credit risk, as well as foreign exchange limits, netting, margins, and general risk factors to consider.
Following the author’s written content you will find four excellent appendices detailing currency codes, the London code of conduct, specifications for exchange contracts, and market terms and conditions for the international over the counter market.
About the author
Author Alan Hicks is an experienced foreign currency exchange market participant, having spent time with Royal Bank of Canada, Chase Manhattan, Fidelity Bank, and Standard Chartered Bank. He later created his own company focused on providing training and education for currency option traders of all skill levels. His depth of experience and international recognition as a currency exchange expert give him the background and practical knowledge necessary to provide the excellent information contained in Managing Currency Risk Using Foreign Exchange Options.