Foreign exchange option pricing: A practitioner’s guide

         Introduction of computers have come with many changes in peoples live. These changes are felt across the globe due to the impact they make on human live. Among these impacts is change of culture, faster relay of information, creating of employment while still making some people lose their employment. The most positive change that computers have brought is globalisation that is making the whole world like a village. This has resulted to growth of international relations between countries of different continents thus promoting trade.

        Means to control trade across the world has seen to it formation of foreign monetary system. This is defined as internationally set rules and convections supporting institution that facilitate trade across the world and how funds are given to various countries across the world. Foreign monetary system also set proper means of payments between buyers and sellers of different nations who use different currency. Formation of foreign monetary system was contributed by introduction of different coins from different countries thus rendering cumbersome trade calculations involving members of different countries due to use of different currency (Madura, 2011).

        Before introduction of foreign monetary system, trade still existed among different counties though they did not have standard trading currency. It was money changers job to provide traders with currency that met their interest. This they did with a commission of specified amount charge in accordance with the amount of money a trader wanted to exchange. It is therefore true that money changers are predecessors of foreign monetary system.

         Formation of any organisation or body (in our case foreign monetary system) comes with its main objective. It is in trying to arrive to these objectives that the future of foreign monetary system is defined. To start with the main goal of this body was to provide an acceptable means of payment among nations all over the world. To make this achievable they have to introduce an international form of currency, ensure sufficient creation of global liquidity and find a way of seeing to it that regime exchange rate is defined among nations currency that will include an adjustment mechanism to avoid imbalances across nations.

         In the course of this discussion it is noted that before formation of foreign monetary system money changers were involved in buying and selling currency provide means of payment of goods by merchants who used different currency. This raises the issue of currency option which a contract that gives a holder the right to buy currency at specified exchange rate at given time. That was by then done moneychanger s but formation of foreign monetary system saw to it that it now their task to sell and buy currency (Clark, 2011). Though foreign monetary system was formed to try and rectify problems brought by money changes, they are still faced by the problem of arbitrage. The act of selling or buying an asset at specified time in order to benefit from it later is what is referred to as arbitrage. In our context, it will occur when foreign monetary system suspect that a given currency value will rise. This prompts them to buy it at lower prices from sellers, hold it for some time to sell it at a later date (mostly when its value rise) holding of cash by banks can result to inadequate currency in a country which will have a negative impact on trade since the media of exchange will be an available (Shapiro, 2010). On contrary to that it is however noted that foreign monetary systems have played a big role in enhancing trade across the globe with less exploitation of merchants as compared to moneychangers.

Reference

Clark, I. J. (2011). Foreign exchange option pricing: A practitioner’s guide. Chichester, West Sussex, U.K: Wiley.

Madura, J. (2011). International Financial Management. Florence, KY: Cengage Learning, Inc.

Shapiro, A. C. (2010). Multinational financial management. New York: Wiley.