The forward goods option is used to cover foreign trade risks. It is a commodity futures contract with limited risk. In contrast to the fixed commodity futures contract, which must be fulfilled by both partners of the contract at the end of the term, the option deal is a conditional futures contract.
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Right to choose as a buyer
As a contractual partner, the buyer has the right to choose whether to exercise the option or to let it expire.
The main advantage of the commodity option business is that, as a rule, it is only exercised when the need to hedge the risk actually occurs.
Types of option can be:
Commodity futures contract
The call option, where a buyer has the right to purchase a futures contract during or at the end of the term from the seller of the call option at a strike price agreed in advance. For this right he pays an option price as a premium. The buyer will only make use of his right if the daily rate is significantly higher than the base price. There is bullish speculation.
The put option, in which a buyer acquires the right to deliver the futures contract during or at the end of the term to the seller of the put option as writer at the strike price against payment of the option price. The buyer will only sell to the writer if the price falls. Hence, bearish speculation is given.
Acquisition of an option to buy
If the acquisition of a call option fully protects against the risk of loss at certain costs, the sale of a call option can lead to further profits when prices stagnate or rise. A profit resulting from exercising the option would be realized. However, the costs for the option business are higher than for the fixed futures business. In addition, the option premium is due immediately upon conclusion of the contract.