Forum Archive Index - June 2002

["trader 100" <trader_100@hotmail.com>]

Snoopy,

A forward contract is an obligation to deliver a specified amount of 
currency at a specified price (spot adjusted for interest differential) at a 
specified future a date.

If a NZ company doesn't want to arrive at the situation of being locked into 
a forward rate that is inferior to the spot rate at the time they should 
enter into an option.

An option contract gives the holder the right but not the obligation to 
deliver a specified amount of currency at a specified price (spot adjusted 
for interest differential) at a specified future a date.

If the future spot rate is superior to the rate nominated in the option the 
option holder can simply let it lapse.  In order to have this right the 
option purchaser will typically pay a premium although it is possible to 
sell another option back to the bank (this structure is called a zero cost 
collar).

Options premiums are determined by the strike price, the volatility of the 
underlying currency and the time to maturity of the option.

Regards,

T100.




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