I want to make sure I have the proper conceptual understanding here. If I actually buy and asset in a foreign country I am essentially: 1. Long the asset 2. Long the foreign currency The total amount invested is the original domestic amount (converted at the spot rate at initiation). If I go long a future or option: The only amount I have invested is the premium (options) or the margin (future). So that amount is subject to currency risk, but the gain/loss is not because I have not invested any more than the premium/margin. At expiration I can convert back to the domestic amount at the prevailing spot rate, so the difference between my premium/margin was not subject to currency risk. Is that right? I don’t know why I am having trouble with this crap…
I could be wrong but I really doubt that they will ask about the currency risk within the derivative security. Is this what you’re asking? I’ve only seen questions pertaining to the local asset currency risk.
No, this is a method to reduce currency risk by using derivative markets for asset exposure instead of cash markets.
Well if you are buying the future in the foriegn currency then you are still exposed to curency risk .
Then clearly I need work on this topic
Slash Wrote: ------------------------------------------------------- > I could be wrong but I really doubt that they will > ask about the currency risk within the derivative > security. Is this what you’re asking? I’ve only > seen questions pertaining to the local asset > currency risk. I agree that would just be overcomplicating the situation . If anything it cd be a agree/disagree type question .
I think that they only mentioned that you would invest in the derivatives market in your home country using futures/options on foreign markets but denominated in your domestic currency - thereby eliminating your currency exposure
I have not seen margin considered in any of the curriculum questions, so I don’t think you need to worry about currency risk with the margin. But here is what we do need to worry about and it is specifically called out in the LOS 42. f Contractual Agreement Position Action Receive Foreign Curr (long asset) Long Sell forward contract Paying Foreign Curr Short Buy Forward contract
^^ agree I have also only seen the purchase of the derivative IN your home country currency FOR the foreign currency…so technically your premium/margin is not subject to any foreign currency risk…
that crossed with fasted… my agree was with hh…but also agree with fasted…
LOS 41. h I am just trying to understand it.
ok… read through that section… now not sure what you wanted answered…?
How about how does it reduce currency risk?