Usage of Option Contracts for Foreign Exchange Risk Management

Today in Romania, in the context of the liberalization of the capital account and under a floating exchange rate (official is a managed floating currency regime established by National Bank of Romania) the foreign exchange rate is very volatile. In consequence the financial institutions, corporations and, especially, the importers and exporters have to deal with a big exposition of currency risk related with their activities. Financial institutions and corporations today must adopt new roles in order to compete successfully in the explosively evolving foreign exchange markets. The methods, instruments and techniques used to manage foreign exchange risk are more complex than ever before. The objective of our paper is to provide the techniques and insights needed to pinpoint opportunities and control risks. We will present the most modern practical methods for managing the currency risk: option strategies (spread, strangle, straddle, etc). Also we will present the advantage, the disadvantage and our opinions related with the use of currency derivatives instruments (especially currency strategies options), making a comparative analysis.