I’m in an international finance class and I need to write a paper about the yen and whether I would recommend purchasing futures or options in the yen. I’ve read all the chapters in the text and looked up articles and I still don’t get it. If the exchange rates are changing and the dollar is worth less than the yen in a month than it is now, how can you profit? Should you buy or sell futures if I think the yen will appreciate? I need someone to ELI5.
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First, terminology. For future contracts you can go long or short (like stocks). For options you have calls and puts (essentially long and short).
If you look at the 6J futures contract, it’s the dollar against the yen. At the moment it’s around 0.76. that’s means, roughly speaking, for every $.76, you get 100 yen (which is about $1.00 when you spend it in Japan). This isn’t quite accurate though as futures contract calculations are more complicsted. Forex spot prices are closer to real world exchange rates.
So if you think the yen will increase in value, you will buy futures long on 6J.
For futures you have to consider the expiration dates. When the contract expires, you have to close the contract, take delivery on the goods, or roll it over to the next contract. For trading you’d likely just roll it over.
I don’t trade futures options so I’m not 100% sure, but I think it’s similar to stocks where you can buy an options contract to control 100 futures contracts at a time. But options is much more complicated in the way it works and is calculated compared to futures, so I won’t get into it here. But basically for an option, if you think the yen will go up, you will buy a put. You kinda have to figure out at what price you think the futures contract will be and when (like .9 in 3 months), as it will affect the price of the option. And the cheaper the option the more you can buy (for more potential profit). Once the options hit it’s contract expiration date, it’s either worthless (didn’t hit the strike price. In our example .9) or has value. Something like 90% of options contracts expire worthless.
The one major advantage of options you only lose what you put in. So if you bought $1000 worth of 6J futures options today, and the contract tanks to .5, you’d only lose the $1000. For futures you win/lose based on the tick value, theres no cap.
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