It may be noted that as between two banks, the option of delivery under a forward contract rests with buying bank. If the customer delivers foreign exchange on 1st April, the has to pay Yen to the customer immediately. In case the counterpart (buyer) in the cover deal chooses to require delivery on 30th April, the bank has to either keep the dollars received form the customer with itself or invest it for one month. Dollar is at premium because the cost of dollar funds is lower that that of yen funds. For one month, even if the dollar is invested the bank would be losing on the interest differential which has to be compensated by offering lower premium to the customer.
From the above discussion , we may deduce the following rule: for purchase transactions quote premium for the earliest delivery.
Next post we’ll discuses more.
3 comments:
Thank you for your thorough description of the forex options. I'm only trading on the spot market but I was always curious about these forex options. It would be interesting to hear what are the advantages for a trader to use options over a spot market and is there any? ps. my website Trading Market Online
forex broker, FX or Forex describes the Foreign Exchange Market, a marketplace where the world's various currencies are traded. It is an interbank market which was created in 1971 when international trade transitioned from fixed to floating exchange rates. Its huge volume and fluidity made the Forex market the largest and most significant financial market in the world, with well over $4 trillion traded daily.
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