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Currency Options as a Financial
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Whether Option as an instrument can be considered one sided to the extent In every transaction involving a sale/purchase of a tangible value (article), it is generally the buyer that makes the choice or option. The seller merely makes the offer to sell. The seller can woo the buyers, can display and advertise his products to catch the eye of the buyer, but he has right to demand any buyer to buy his products. It is that there is scope for the buyer to select his sellers, but not such a scope for the seller, who can only thank a buyer, when he buys his goods. But this is not to be considered as a one-sided phenomenon prevailing in a market environment. When the seller is strong he knows his products will be sold, that every year normally his turnover will improve. This is because his product has a utility and the buyers need his products for their satisfaction. The seller has salesmanship and marketing skills and he can predict the psychology of buyers. This is the general pattern of all buying and selling. Viewed in this sense the case of the Option seller is not different. The option seller is in the business not under compulsion, but because he finds this business paying and it further suits his interests. He is in the business because, the business benefits him and he will not continue in the business unless it is so. This being the background of the commercial system, we may consider in more details various features of the Currency & Interest rate Sale/buy options in foreign exchange market An option is a contract between two parties in which one party grants the other to buy/sell an asset at a specified price while the counter party assumes an obligation to sell/buy that asset at the agreed price. The party retaining the right to buy/sell is the option buyer ort holder and the party granting the right to buy or sell is the option writer or grantor. It is important to note that an option contract confers the right but not an obligation on the option buyer. On the other hand, an option contract imposes an obligation (to buy or sell as the case may be) on the option writer. A foreign currency option is the contract that provides the buyer the right (but not the obligation) to buy/sell specified quantity of foreign currency at an agreed upon exchange rate on payment of a specified amount as fee. The exporter buys a put option to sell his export earnings, while the Importer buys a call option to buy foreign currency. Thus the Indian exporter who buys a put option on Dollars will exercise the option and sell his currency only if the exchange rate for Rupee-Dollar is adversely affected. If the value of the Dollar appreciates in terms of the rupee, the Exporter in the normal course will receive a higher payment on account of the market fluctuation and he will not buy the option. Similarly the Importer who buys a call option to buy Dollars will exercise the option when the value of rupee falls and he has to make a higher payment in rupees for the import transaction. On the other hand if the Rupee appreciates and he has to pay at market rates less rupees towards payment, he will not buy the option. In either cased the Option Writer gains the income by way of premium. This income is a non-fund based income i.e. an income generated without any investment or sale or purchase. In the technical and legal sense, the options are loaded one sided i.e. a pairing of right and an obligation between two parties. On other hand the buyer of the option when he does not make the buy/sell, does incurs a sacrifice since he has to make payment of the premium or fee to the option writer, without getting anything in return. Thus the option writer will be gaining a good income even if most of the option buyers close the transaction with a buy/sell. Trading of options is thus a trading of risks, and the consideration is the premium charges, When risk materialises the option is exercised, otherwise it will not be. This is a financial service and the option writer is equipped and possess the expertise to undertake this service. He continues the business because the business is overall lucrative to him. Thus though the statement is formally or technically correct, it may not be so materially. |
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