Question

With the expertise that you have gained, you are contemplating becoming a FX trader. You want to speculate on a particular currency (Japanese JPY Yen). What is a better choice for speculating futures contracts or options contracts? Refer to these websites:

Www.cme.com

Www.PHLX.com

Answer 1

The speculators in future markets can be referred as commercial or non commercial traders.

• Commercial traders use futures in a given commodity for hedging purposes.
• Whereas non commercial owners don’t own the underlying assets or its financial equivalent but hold positions only in futures contract.

Traders & investors always look for new ways to capitalize on price movement of assets. In this case they can use futures to speculate on price movements of underlying assets. Investors can purchase gold futures to capitalize on downturn while traders can purchase corn futures to capitalize on high pricing. The speculators are interested only in price appreciation & never intend to take delivery of underlying commodity.

Investors use futures to hedge ownership of underlying asset & to speculate on information changing mean of future price. They use options to speculate information changing the variance of future price. When investors can trade future contracts, the option delta can’t be used to derive optimal hedge ratio without adjusting for undiversifiable risk between options & futures. In particular, investors use positions that emulate straddle to speculate on variance & positions that emulate write options to speculate on mean.