Question

(1) What are the biggest question(s) we need to address in any derivative market?

(2) Suppose I am a trader, who buys and holds Japanese Yen. How could I use forward to protect my holding of Japanese Yen?

Answer 1

1. Biggest questions we need to address in derivatives market-

A. We need to derive the the volatility of the derivative security in respect to the underlying security.

B. We also need to estimate the overall option greeks when we are exposed to option trading like beta,gamma, theta.

C. we need to compare the cost of entering into the derivative market in respect to the Forward Market.

D. We also need to consider the margin requirement for derivative trading

E. we also need to abide by any kinds of rules and regulations which has been specifically placed and restrictions which has been specifically made by the regulator

2. One can use forward contract to protect Japanese yen by entering into forward currency trades in which one need to take opposite trade like in this case since the trader is already holding the Japanese even he will be trying to sell it in the Forward Market in order to hedge it from any downside risk.