The World of Small Businesses Need FX Options

Certainly, one of the most prominent topics in the FX world is, “Who is trading FX?” Treasurers in the large institutions have been using FX to hedge their profits for years. Why? The answer is simple. When billions of dollars are at risk, a small percent change in the exchange rate of a currency will have a massive impact to a bottom line. They have the choice of using forwards, options and structures products (structured products being nothing more than combinations of forwards and options to create a derivative). The financial strength of the company allows them to connect with multiple banks to get the best prices to implement their strategies.
I recently read Rob Shelton’s article Foreign Exchange Options Now a Must for Corporates With Overseas Exposure in Csuite and Today’s CFO about this topic as it pertains to smaller companies who are now recognizing they have the same exposure as the big guys. Although they may not have public shareholders who watch profits as the stock prices go up and down, they certainly have stakeholders. Forwards, mitigate the risk, because they lock in a rate for some time in the future. If the market goes against them, the forward hedges the amount. Unfortunately, if the market goes in their favor, the forward does not allow them to take advantage of more favorable rates or as Rob Shelton calls it, “participate in upside market movement”. This is where options shine!
The article talks to an increase of 30% in of use of options. Again, the reason is simple. If the market rates go against them, the option increases in value to hedge the exchange rate.  If the market rate benefits the treasurer or trader, then the option will reduce to 0 intrinsic value, but never be less than 0 and clearly not take money away from the treasurer. In other words, the trader can participate in and benefit from a favorable movement in the exchange rate.
Why don’t more corporate treasurers know about this? It’s because the banks where they trade are hammers and to them, everything is a nail.  Contact FX Bridge and we’ll help you find the right dealer so you can trade options. Spread the word. Options are better than forwards.

Educate. Strategize. Trade.

Leave a Reply

Your email address will not be published. Required fields are marked *