Currency Options and Their Role in International Trade Essay

Currency Options and Their Role in International Trade - Essay Example In order to deal with the problem of changing market prices, the trader needs to continually evaluate and analyze the functions of the market and the goals of the business enterprise (Stanley 1998). In addition, the business must be in a position to put in place new market rules and to be monitoring the trade trends and its development. In most of the world states, trade has emerged as one of the key sectors of the economy and most of her citizens depend on the trade for their source of living. The growth of the energy markets and the strategies of the energy providers have been the driving force of these trade improvements over the recent years. A number of commodities in the energy sector such as power, gas, carbon dioxide and even the weather have found their way into the trade market in societies. This has led to the improvement of the use of the scarce resources and increased complex organizations, process interfaces and the system infrastructures. The increased demand for data quality has led to most organizations to adopt the need for risk management that reduces the operational costs during the production process and the actual trading exercise (Dell’Ariccia & Marquez 2010). The international trade is finding its way in society and people have actively been involved in the same and this has led to the emergence of new market models such as market coupling are being discussed and this has made it easier for cross-border trading. On the other hand, the international trade implies that different rules and procedures must be followed and this has led to a change in the trading system that bring on board a number of challenges that require adaptation into existing risk management mechanisms. Exchange Traded Currency Options Foreign exchange traded currency options give a company or an individual the right to exchange the currency of their country into another currency of another country at pre-agreed exchange rate at a given time in the future. This i s the world’s market option although most of the currency trade is done in private and hence it is not possible to determine exactly how large the market is. This form of trade is regulated however in a minimized way and most of the transactions are over the counter. With a few exceptions that are traded on exchanges such as the International Securities Exchange, the Philadelphia Stock Exchange, or the Chicago Mercantile Exchange that has options for future contracts (Dong-Hyun & Gao 2003). In the past, the universally accepted currency option was valued by the Bank for International Settlements. For any business enterprise that wish to grow in the international market, there is the need to value the Foreign Exchange factor. Most of the organizations often do not take this risk factor into consideration during their contracts hence the delayed growth, and success in the international market. The international market often fluctuates in value and a given asset or commodity val ued at a given price at a present time might be valued at a higher or lower price in the future due to the exchange rate factor (Manzur, Hoque, & Poitras 2010). In the currency option therefore, the product that is to be traded called a derivative is based on a universally acceptable instrument that