Another "verify my logic’ question.
If one expects ONLY an adverse currency movement, he would use futures to hedge the risk.
If one is not sure, or if currency movements are volatile, one would want to use options to preserve the upside.
Correct?
thats how i understand it:
clear view of currency move = use forwards (they are cheaper)
unclear view of currency move = use options
Yep. The way I remember it is that if you are not sure which way the currency is moving, you have the potentail for gains if it goes up. Put options allow you to participate in the appreciation of a currency. Futures will have symmetricd payoffs, meaning you wont get the benefit (so you use it when you expect currency to depreciate as it is cheaper than a put)
Makes sense to me now that I realize forwards actually are a directional bet. Previously I thought forwards were hedging both directions since you’re guaranteed a price in the future. But now I realize a short forward is betting on prices going down, while a long forward is betting on prices going up. The main difference from options is that options protect you from the downside in case your bet is wrong (at a cost of course).
futures/forward = linear payoff Options = Nonlinear payoff Also, I agree with mcap11’s statement…, though you can buy a call or put options if you have a clear view of currency move, but the benefits of using forward/futures over options is that forward/futures requires no initial cost, while you have to pay an initial cost with Options.
The benefits of using forward over futures is that you can really customize the forward contract to have potential payoff match your obligation…, as opposed to futures contract which is pretty standardized.