Options Markets

The options market is another market to hedge risks arising form variable exchange rates. Here risk is traded separately from the financial instrument carrying this risk.  What takes place at the options market?  First, let us concentrate on the word options. An option, by definition, is a choice available to the investor. What is the choice regarding? The choice, dependent on a pre-specified price, is regarding honoring the contract to buy or sell a currency at some future date. Thus in a contract to buy, if the market price prevailing at that future date is higher than the pre-specified price, one will go in for the purchase of the currency at the contract price, i.e., the contract will be honored. However, if the market price at that date is lower than the contract price, it would be advantageous not to honor the contract. The reverse is the position in the case of a sale contract.  Now, you will remember that this facility is not available in the forward market. Both future market and options market have grown to provide the much needed flexibility to the forward market. Cross-border dealing between market participants, more so between institutional players, has lead to the development of Euro market. These are market without any nationality, that is financial instruments is such markets are denominated in currencies different form the currency of the country where the market.  The Euro market can be loosely divided into a Euro currency market for short-term finance and a Eurobond markets for longer-term financing a loan raised in the Euro currency market normally has maturates up to six months, though facilities for medium-term financing are also becoming available. With the Euro currency market, the most important and widely used currency is the Eurodollar, which is largely a reflection of the economic importance of USA in the world economy. Eurobonds are denominate in one or more of the Euro currencies and arranged by international underwriting syndicated or investment banks. They can be sold in several countries simultaneously so that not only the underwriters but also the investors come from many countries.