TheStudent
Junior Member
- Joined
- Mar 12, 2011
- Posts
- 40
I am no financial expert, but ill try to tell you what I know.
If you wish to lock in your rate, for when you travel, with no exposure to either upside or downside, you want a forward or futures contract, which will both give you the set price in the future. The difference between the two is that in a forward contract you can specialize it to your needs, for example you sign an agreement with the banks that at x date you will convert your set amount of AUD into USD at the date agreed on now. On the other hand, a futures contract is less flexible, as it has a set expiry date (usually around six months, maybe??) and is for a set amount of money, and thus, while having the same effects as a forward, it can be easily traded on the market (If you were to do this - you would buy contracts from the ASX through a broker).
If you want the possibility of taking advantage of favorable movements, you then look at option contracts. There are two common sorts, American options and European options (Australia to the best of my knowledge uses mainly American options). With American options you sign (and pay for) an agreement where you can buy the underlying asset at ANY time in the future, up too and including the expiry date. Thus you get a highly flexible option, but to make it worthwhile for the other person (In the "short" position) to enter into the contract, the initial price you will buy the option for will be extremely steep.
For the European options (If they are available) you will only be able to exercise the option on expiry, and as a result they are a lot cheaper (But still can be up to 10% of the value of the underlying asset in some cases, I am told), but still allow you to take advantage of any favorable movements between the price today and the price at the expiry date. However, again as traded items, option contracts are generally tightly controlled, in the way futures are, to standardize them so that they can be traded.
To sum up - option contracts are expensive, and in order to break even or make a profit, the underlying asset must move to your advantage by at least the initial price of the option.
- Forwards and futures are very cheap or even free to enter into, but do not allow you to take advantage of favorable movements the way options do, but are a very inexpensive way of locking in a future price.
The one thing to remember in all of this is that for all of these so called "derivatives" the person on the other end is making the opposite bet - for every cent you win - he loses, and vice versa. I advise you to talk to a broker or other financial specialist about your hedging options, as it is very easy to lose a LOT of money by making the wrong bets (Think back to Bearings Bank). One final word of caution: some of these derivatives, I do not know which, increase your losses exponentially if the markets move against you, so make sure you know what you are doing, and have professional advice, before you invest.
Also, you said you were going somewhere in South East Asia - have you considered the fact that you still have to convert USD into the local currency?
Good luck, I hope this has answered some of your questions.
If you wish to lock in your rate, for when you travel, with no exposure to either upside or downside, you want a forward or futures contract, which will both give you the set price in the future. The difference between the two is that in a forward contract you can specialize it to your needs, for example you sign an agreement with the banks that at x date you will convert your set amount of AUD into USD at the date agreed on now. On the other hand, a futures contract is less flexible, as it has a set expiry date (usually around six months, maybe??) and is for a set amount of money, and thus, while having the same effects as a forward, it can be easily traded on the market (If you were to do this - you would buy contracts from the ASX through a broker).
If you want the possibility of taking advantage of favorable movements, you then look at option contracts. There are two common sorts, American options and European options (Australia to the best of my knowledge uses mainly American options). With American options you sign (and pay for) an agreement where you can buy the underlying asset at ANY time in the future, up too and including the expiry date. Thus you get a highly flexible option, but to make it worthwhile for the other person (In the "short" position) to enter into the contract, the initial price you will buy the option for will be extremely steep.
For the European options (If they are available) you will only be able to exercise the option on expiry, and as a result they are a lot cheaper (But still can be up to 10% of the value of the underlying asset in some cases, I am told), but still allow you to take advantage of any favorable movements between the price today and the price at the expiry date. However, again as traded items, option contracts are generally tightly controlled, in the way futures are, to standardize them so that they can be traded.
To sum up - option contracts are expensive, and in order to break even or make a profit, the underlying asset must move to your advantage by at least the initial price of the option.
- Forwards and futures are very cheap or even free to enter into, but do not allow you to take advantage of favorable movements the way options do, but are a very inexpensive way of locking in a future price.
The one thing to remember in all of this is that for all of these so called "derivatives" the person on the other end is making the opposite bet - for every cent you win - he loses, and vice versa. I advise you to talk to a broker or other financial specialist about your hedging options, as it is very easy to lose a LOT of money by making the wrong bets (Think back to Bearings Bank). One final word of caution: some of these derivatives, I do not know which, increase your losses exponentially if the markets move against you, so make sure you know what you are doing, and have professional advice, before you invest.
Also, you said you were going somewhere in South East Asia - have you considered the fact that you still have to convert USD into the local currency?
Good luck, I hope this has answered some of your questions.