Assignment on As a financial consultant, you understand that if the US businessman accepts your suggestion to use Australian dollars futures to hedge his risk and eventually it turns out the US dollars depreciate significantly against the Australian dollar, your client must be very unhappy and you will lose your client. You know the alternative way to hedge is to use the options.

Futures can be a low-risk way to approach the prospects' markets. Numerous modern dealers begin by exchanging prospects alternatives rather than straight contracts (futures). There's less hazard and instability when purchasing options compared with futures. Many professional dealers as it were exchange choices. Sometime recently you'll trade futures alternatives, it is vital to get it the nuts and bolts. An choice is the proper, not the commitment, to purchase or sell a contract at an assigned strike cost for a specific time. Purchasing options permit one to require a long or brief position and guess on in case the cost of a prospective contract will go higher or lower. There are two fundamental sorts of choices: calls and puts (Sercu, 2009).

The buy of a call choice may be a long position, a wagered that the basic prospects cost will move higher. For case, in the event that one anticipates corn prospects to move higher, they might purchase a corn call option. The purchase of a put alternative may be a brief position, a wagered that the fundamental prospects cost will move lower. For case, in case one anticipates soybean prospects to move lower, they might purchase a soybean put option (Pandey, 2015).

Types of Options

There are three sorts of contract options: in-the-money (a contract that has inborn esteem), out-of-the-money (a contract with no inherent esteem), and at-the-money (a contract with no inherent esteem where the cost of the basic resource is precisely rising to the strike cost of the option).

Key Terms

Premium: The cost the buyer pays and the vender gets for a contract is the premium. Options Contracts are cost protections. The lower the chances of a contract moving to the strike cost, the less costly on an outright premise, and the higher the chances of an alternative moving to the strike cost (Pandey, 2015).

Contract Months (Time): All contracts have a close date; they as it were are substantial for a specific time. Alternatives are squandering resources; they don't final until the end of time. For case, a December corn call terminates in late November. As resources with a restricted time skyline, consideration must have concurred to choice positions. The longer the length of a choice, the more costly it'll be. The term parcel of an option's premium is its time value. Strike Cost: This can be the cost at which you may purchase or offer the fundamental prospects contract. The strike cost is the protection cost (Fridson & Alvarez, 2011).

Think of it this way: The distinction between a current showcase cost and the strike cost is comparative to the deductible in other shapes of protections. As a case, a December $3.50 corn call allows you to purchase a December prospects contract at $3.50 anytime sometime recently the alternative terminates. Most dealers don't change over choices to prospects positions; they near the choice position sometime recently termination.

1.      Assume you have done some research and come to a conclusion that the AUD will appreciate against USD significantly in the next 6 months. How would you use futures or options or both, listed in the above two tables, to form strategies to realize your profit if your forecasting proved to be true? You need to discuss the risk and return of your strategy and the possible follow-up actions to take to stop the loss if the market moves against you. The simplest way to control loss is, of course, closing your total position. But your discussion can include more. When you need the price to illustrate your result you can use “Prior Settle” though in the reality you need to call your broker to get correct market price

According to the given case scenario, Australian dollar future prices are having a negative change (as presented in table B 1). In the month of March (2020), the recorded price for options was 0.6521 that changed by the negative percentage of 0.01 and recorded the highest closing price of 0.6626. However, from March 2020 to December 2020 the change values are negative which indicate depreciation of Australian dollar future prices on a monthly basis. Instead, a positive change value could represent a growth trend of Australian dollars future prices. Negative change values for future prices represent a higher probability of loss. The changes in the prices of the currency will have a significant impact on the businesses that are dealing in currencies like the US dollar. If the Australian dollar will experience growth than it means that the businessmen who are dealing in the US dollar can experience loss. The hedging strategies such as using futures or options contracts should be utilized so that the businessmen who are dealing in the US dollar won’t experience a financial loss. In order to generate profit, the foreign exchange risk has to be mitigated up to a lot of extents (Sercu, 2009).

For generating profit the future contracts should be used. Such strategies will have to be adopted which will allow the businessmen to mitigate the risk up to a lot of extents. The businessmen should select such a predetermined price which will allow it to generate profit. It is evident that foreign exchange risk has a significant impact on the financials of the businesses. If the businessmen are not going to utilize the option or future contract than the businesses can suffer a significant amount of loss which will not only decline its profitability but also sustaining, in the long run, will become difficult for the corporation (Chandra, 2011).

Futures can be a low-risk way to approach the prospect's markets. Numerous modern dealers begin by exchanging prospects alternatives rather than straight contracts (futures). There's less hazard and instability when purchasing options compared with futures. Many professional dealers as it were exchange choices. Sometime recently you'll trade futures alternatives, it is vital to get it the nuts and bolts. The buy of a call choice may be a long position, a wagered that the basic prospects cost will move higher. For case, in the event that one anticipates corn prospects to move higher, they might purchase a corn call option (Fridson & Alvarez, 2011).

The prior settlement is made in each month for opening prices of future options. The prior settle values for the month of March, April, May, June, July, September, and December are 0.6640, 0.6640, 0.6640, 0.6639, 0.6638, 0.6637 and 0.6633 respectively. However, in the month of august overall prior price settlement was 0 because of no trade changes occurred in this month. Furthermore, investors of Australian dollar futures will earn profit in case of appreciation at Australian dollar prices against the US dollar. However, depreciation of future prices will result in a decrease in profit margin and arbitrage profit for the investors.

References

Chandra, P., 2011. Financial Management. s.l. Tata McGraw-Hill Education.

Fridson, M. S. & Alvarez, F., 2011. Financial Statement Analysis: A Practitioner's Guide. s.l.: John Wiley & Sons.

Pandey, I., 2015. Financial Management. s.l. Vikas Publishing House.

Sercu, P., 2009. International Finance: Theory into Practice. s.l. Princeton University Press.