Currency Future or Option for Hedging? Cheers

adehbone

Hi

Notes says, 'if the manager is primarily concern with unfavorable movements, he will use future....'.

I know future is cheaper, but if the manager only care about one side movement, should he use Option, which is a protection for one side movement?

Quite confused by when to use CCY Future and when for Option....

Cheers

liangfeng

The future locks in a price - the options sets a floor and creates a range (in a put, strike - cost).

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mik82

Like jcole21 indicates, the future locks in a price, hence you cannot lose but also NOT win. And that's different with an option where you cannot lose but can win, i.e. you keep upside potential. This feature has a price, that's why options cost money and futures are free (the cost for a future is that you don't have upside potential). Hope this helps.

mp3bu

Thanks, Jcole21 and RCash.

Just still confused by ' 'if the manager is primarily concern with unfavorable movements, he will use future....'. '

Your answers are good for the difference of future vs. option, but it does not help me understand the statement.

It seems both future and option will work ''if the manager is primarily concern with unfavorable movement'?

canadiananalyst

You are correct, both will do the trick.

If you are a manager and concerned only with movements, you want to lock the rate at minimum costs. Hence a future will exactly just do that.

An option is more expensive and will be used by a manager that also want to profit from favorable movements.

thommo77

great!, R Cash.

So the trick is at the keyword 'concerned'!

jmh530

The keyword is "primary." Options and futures will both satisfy the need to hedge risk. An option will give you added upside; however, the upside comes at a cost, the premium you pay on the option. If the primary concern is to hedge risk/movement, you would opt for the cheapest of the two alternatives that meets the minimum requirement, which is a futures contract.

Darien

Futures forgo upside potential as the price for concern while options keeps upside potential for a fee.