A Currency Options (CO) Contract is an agreement that gives investors the right, but not the obligation, to buy or sell a Currency Futures Contract on a future date at a fixed price. COs give investors the right to buy the underlying Currency Future. Put Options give them the right to sell it. Investors are required to pay a premium for choice of exercising the Option or not. The premium is calculated based on the volatility of the underlying exchange rate.
Who is this for?
Investors, importers, exporters and travellers can use COs to hedge themselves against movements in the exchange rate. Speculators use COs to make a profit on short-term movements in prices. Arbitrageurs use them to profit from the price differentials of similar products in different markets. Some investors also use COs to enhance the overall performance of a portfolio over the long term.
- Limit losses to the premium paid as investors are not obliged to buy or sell the CO underlying the Option on expiry.
- Provide protection against exchange rate fluctuations in investment portfolios.
- Allow the holder to fix prices for import and export purposes.
- Allow investors to take advantage of price movements in the exchange rate because they can take a view as to whether the exchange rate will strengthen or weaken.
- Standardised contracts traded on a regulated exchange eliminate counterparty risk.
- Highly liquid market.
- Investors may lose the premium paid if they choose not to exercise the Option.
- Traded based on margins that change based on the underlying currency’s volatility. This means that investors may be required to make additional payments on a daily basis should their initial margin payment become insufficient because of movements in the underlying currency.
How to get it
Register as a client with an authorised JSE Currency Derivatives member, deposit the required initial margin and sell or buy according to your needs.
- No limits apply to individuals, foreigners or corporate entities.
- South African pension funds, collective investment schemes, financial services providers and insurers are subject to their foreign portfolio allowances.
- For all the details relating to qualifying factors, speak to your broker.