Currency Options

fintan

Hi

I just talked to my bank manager about buying currency options ( i have a business account).

She rang the relevant department, they talked away for a few minutes and she then proceeded to try and sell me a forward contract.

After much explanation on my part, I explained that I didn't want a forward, but would much rather buy an american style call option.

So I was promised that someone would call me about it, lo and behold no telephone call.

Now I know the amount is small, I need to hedge about 40K sterling which in options terms is tiny. But it will be an on-going positon and will increase in size.

Has anybody here bought an option in Ireland? If so any advice in where, what, who?

Hitchhiker's Guide to...

You could try the following: http://www.etradeprofessional.co.uk/futures_home.asp (i've never used them myself but etrade have a good international reputation). There are also a range of other UK online sites that you can trade options and futures. Sharespread.com is the only place in Ireland that i could see where you could purchase futures and options, but presumably you would get better value in the UK due to the greater competition.

You might also like to look at the range of currency traders on this page: (http://www.frenchentree.com/fe-directory/home.asp?Search_Company=&Filter_category=FC&B1=+Search+#). This link is about hedging currency for property transactions.

Just three points:

1. Why are you determined to get an American style option? Would a future or a forward not be a better choice if the position is going to be (as you state) a continuing one. A downside of buying an option as opposed to a future or forward is that the option is essentially a speculation on the price of a currency at a particular date (even though you can cash in an in-the-money American option before the expiry date). This speculation about the currency at a particular date does not seem to match your requirements for an ongoing hedge. A future with daily differencing would presumably suit you better.

2. Do you really need to hedge? For the hassle involved and the cost, will it really be worthwhile?

3. Are there any natural hedges you can create without having to deal in derivatives? Without knowing your specifics i can't give advice, but a lot of companies attempt to create natural hedges of their currency exposures by; for example, if they are trading in the US market then they will raise the necessary investment capital for their US trading in the US. This means that they are comparing their return in the US to a US cost of capital. Although maybe this isn't relevant to your situation.

fintan

Hi Roundtower

Im a small business person, with a very small bank balance, working on tight margins.

I have been trying to source my raw materials in euros but can't. I have to buy my materials in stg but get paid in euros. Only other thing I can do is to try and sell more in northern ireland.

I have to quote a job between 1 to 3 months in advance, with no guarantee of getting the contract. That is I would like to be able to know that I can buy sterling at a given rate but NOT have to buy sterling at a given price. Therefore the american call option instead of a foward.

I need to find out how much an option costs before I can determine if it is worth my while to take out.

Thanks for the links though

Cheers

Fintan

RainyDay

Could you make a 'bet' against the currency movement on one of the spread betting exchanges.

fintan

Yes I could take out a CFD on the Fx rate, but as I cant guarantee I will need the currency in three months time, Im tying up cash flow uneccesarily.

Currently Im just using the three month forward rate for all my calculations

antoinolachtnai

I think you are looking for the right product. I've never bought this type of product in Ireland. Ring AIB capital markets and a few of the others, and ask for the FX desk, see if they'll be able to sort you out. Be sure to get a price from a few places.

An american-style option like you want is a 'bespoke' product, while a forward rate is pretty standard. This is why your bank manager won't be able to sell it to you, you have to talk to an FX specialist.

A European-style option woudl be cheaper, and might suit your needs almost as well, if you were able to borrow sterling for a couple of weeks.

Don't feel tied to your own bank. Also, there's no reason not to buy the option from a UK bank. They are doling out GBP/EUR transactions at a rate of knots and might be able to facilitate you.

You don't even need a credit line to buy an option (you do need a credit line to buy a forward contract, because the bank has to be certain that you will follow through on your commitment to purchase currency)

You don't have to do the fx transaction with the same institution you took the option out with.

I think I saw a number of companies in the UK offering currency services in ads in the FT and elsewhere, but I could be mistaken.

a.

fintan

Cheers, I'll have a look at the ads in the FT