Panic about the forint exchange rate? Buy an option instead of changing money!

Due to the unpredictable Hungarian economy and the persistent weakness of the forint, many people are converting their forints into euro. In a previous post, we already discussed that the cost of switching back and forth can be as high as 4-5%, you could lose up to 3-6% on a premature break in the forint deposit, and you get 2% on the euro deposit, and up to 7-8%, this is an additional 5-6% spread over one year.

And if the exchange rate corrects itself back to its 10-year average in the near future (somewhere around $ 10), you could easily lose another 15%.

Adding all of these together

Adding all of these together

You could be up to $ 3 million minus $ 10 million. What you are certain about (deposit break, conversion cost, interest rate differential) can reach 1.2 million HUF.

But what do you do if you are afraid that the exchange rate of the forint will collapse and fall even more than your sure cost?

The solution is to buy options.

But what is that option?

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Whatever we trade, we can sell our “product” in two ways, be it foreign exchange, flour, oil, whatever.

The first option is to buy or sell the product at market price, convert currency, etc.

The second option is to agree on a date in advance, for example, I want to buy / sell euros, forints, flour, oil, whatever, in 6 months.

This is called futures trading. Depending on whether they are traded over the counter or over the counter, they are called forwards or futures.

Why is this good? For example, if you make biscuits and deliver them to a German retail chain, only 15% of the total profit would be very sensitive if either flour or the euro were to become more expensive and make production unprofitable.

That’s why you say you don’t care how much the euro or flour will be in 6 months, you buy it now for delivery. If it is more expensive, you are doing well, if it is cheaper, it is bad, but at least it will keep the 15% profit rate.

In futures, someone wins, someone loses

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But what if I could say that I only want to buy it if its current price is 6 months later than the currently negotiated price?

This is the option. I buy the right to buy flour, euros, oil, anything if its price is more than the bargain price.

(There is a Put Option, a Put Option, a Put Option, a Put Option, there are European, American and Asian options and many more important and interesting information, but I’ll write about that later.)

As long as the futures contract is settled, either I or the other party, the option will be exercised only if the option holder pays off the option. Why buy a euro for 317 forints if for half a year it is 285 forints?

But this right is not free. With this option, you can decide which end of the bot to stand on. We can take money for money, or we can take sticks, but then we ask for money.

Remaining price for an option in a currency is determined by maturity, volatility (exchange rate fluctuation) and exchange rate. It is cheaper to buy at a rate of 400 HUF / EUR than at 270 HUF / EUR. If the exchange rate has not fluctuated for half a year, the risk of the issuer (obligor) is lower again than it is to jump 10 HUF per day.

Kenneth Carnes