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Account in which all the foreign transaction are captured of a particular country.
Systematic record of all economic transactions between the residence of a given country
and the residents of other countries(the rest of the world) carried our in a specific period
of time normally a year.
It also refers to merchandise imports and exports(visible trade) and to all
economic transaction including invisible transaction like banking, insurance, transport
services and so on. Balance of payment is based on the standard double entry system of
book-keeping i.e. every entry enters twice once as a debit and once as a credit.
Ex- Export of Goods, Export of services like travel insurance, capital inflow into the
country and decrease in foreign currency reserves.
Balance of payment is divided in three parts:-
1 Current Accounts
2 Capital Accounts
3 Monetary Movements
A currency option allowed the holder to buy (if it is a call) or sell (if it is a put) and
underlying currency at a fixed exercised way expressed at an exchange rate. Many
companies knowing that they will need to convert a currency X at a future date into a
currency Y, will buy a call option on currency Y specified in terms of currency X.
Example:- A U.S. company will be needing 50 million euro for an expansion project in
three months. Thus it will be buying euros and is exposed to the risk of the euro valuing
against the dollar. Even though it has that concerned it would also like to benefit it the
euro weakest against the dollar. Thus it might buy a call option on the euro. Let us say it
specifies an exercise rate of 0.90 dollars, so it pays cash up front (option premium) for the
right to buy 50 million euros @ 0.9 dollar per euro. If the option expires with the euro
above 0.90 dollars the company can buy euros at 0.90 dollars and avoid any additional
cost over 0.90 dollar but if the option expires with the euro 0.90 dollars the company will
not exercise the option and the affective cost to the company would be euro marker price
and option premium.
Q- What happens at exercise depends upon whether the option is a call or a put?
Ans.- If the buyer is exercising a call she pays the exercise price and receives the
underlying. On the opposite side of the transaction is the seller who receives the exercise
price from the buyer and delivers the underlying which is currency. If the buyer is
exercising a put she delivers the stock and receives the exercise price. The seller of the
put option therefore receives the underlying and must pay the exercise price. This type of
settlement is known as physical type of settlement.
Another type of settlement is called cash settlement in that case the option holder
exercising the call receives the difference between the market value of the underlying
which is currency and the exercise price from the seller in cash. If the option holder
exercises the put she receives the difference between the exercise price and the market
value of the underlying i.e. currency in cash..
Cash settlement:- There is no concept of delivery only profit & loss should be exchanged.
For example:-