Posted by forex at 6:39 AM
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1. Assess your exposure to determine which type of options to buy. If you're making future delivery of foreign currency, buy 'calls.' If you're accepting future delivery of foreign currency, buy 'puts.' According to Investopedia.com, calls give investors 'the right to buy,' while puts give them 'the right to sell.'
2. Calculate how many contracts you need. According to the NASDAQ website, foreign currency options represent '10,000 units of the foreign currency (1,000,000 for the Japanese Yen)' per contract. If you need 100,000 euros, buy 10 contracts.
3. Determine your time horizon. According to NASDAQ, options expire on the 'third Friday of the expiration month.' Buy contracts that expire immediately after you're expected delivery date. Options expiring before your delivery date won't protect you for the duration of your exposure, while those that outlive their usefulness carry a higher expense.
4. Close out your position when it's time to make or take delivery of your foreign currency. Do the math to determine which will be more beneficial: exchanging your option for the foreign currency, selling it to another investor or letting your option expire worthless.