Foreign Currency Futures and Options:
Foreign currency futures and options are futures and option contracts based on foreign currencies, such as the British Pound, Euro and Japanese yen. The purpose of this post is to provide the reader with general information relative to these type of investments. Please keep in mind that this post is being provided for educational purposes only. It is not designed to be complete in all material respects. Thus, it should not be relied upon for legal or investment advice. If you have any questions concerning the contents of this post, please contact a qualified professional.
The buyer of a foreign currency futures contract acquires the right to buy a particular amount of that currency by a specific date at a fixed rate of exchange, and the seller agrees to sell that currency at the same fixed price.
Call options give call buyers the right, but not the obligation, to buy the underlying currency at a particular price by a particular date. Call options on foreign currency futures give call buyers the right to a long underlying futures contract. Those buying put options have the right to sell the underlying currencies at a specific prove by a specific date. Most buyers and sellers of foreign currency futures and options do not exercise their rights to buy or sell, but trade out of their contracts at a profit or less before they expire.
These types of investments allow the investor to either speculate or hedge. Speculators hope to profit by buying or selling a foreign currency futures or options contract before a currency rises or falls in value. Hedgers buy or sell such contracts to protect their cash market position form fluctuations in currency values.
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