What is the Difference Between the Term Hedging and Speculation in Relation to Currency Options?
There are many preconceptions with “hedging” and “speculation”. The term Option brings up memories of Nick Leeson bringing down Barings Bank in Singapore speculating with Stock Index Options. It’s important to understand Options can validly be used as Risk-Management tools, without a need to have a view of the market. When you buy an FX Option, the total risk you take on is the premium paid for that Option, you cannot possibly lose anymore over the premium value. The use of FX Options in managing currency risk allows you to protect a rate while being flexible to benefit if the market rate improves in your favour. This is particularly relevant if you can achieve a protection rate (worse case rate) at or above your budget rate, while leaving you open to benefit from any upside over the period you hedge. However, it is important to understand the parameters of each Currency Option structure. If you hedge a particular volume of currency using an FX Option, there is a possibility you will b
