Page 205 - AFM Integrated Workbook STUDENT S18-J19

Hedging foreign exchange risk

7.3 OTC options and traded options

OTC options Traded options

 Tailor made to fit a company’s  Standardised contract sizes
precise requirements
 Greater price transparency than
 Expiry dates are often significantly with OTC options
further ahead than with traded
options  The exchange offers protection from
counterparty default
 Not transferable if the company’s
requirements change

7.4 Advantages and disadvantages of hedging with options

ADVANTAGES DISADVANTAGES

 Flexibility (many choices of exercise  High up front premium costs
/ strike prices, dates, premiums)

 Can be allowed to lapse if not
required

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