Options of foreign currency are contracts having an up- front value of fee, and the owner is provided with the right, rather than the obligation for trading between foreign currency and domestic currency within a specific quantity at a specific price for a specific period of time. There seem to be a number of different variations when considering options. The different types of options are highly dependent on the time of exercising to determine the price paid off or the change of paying off. While there is an existence of different varieties, there seem to be some corporations regarding the key significance of exposures of hedging transaction.
Scenario analysis is described as the methods that have the broad purpose of creating and/or strengthening awareness about the future by offering alternative future images and choices of action based on those images (Peter N. Duinker, 2007).
Under these methods, the key point of research associated with the future is about what may happen and what most likely would happen. The overall goal is to identify storylines and themes for the scenarios that cover a full range of possible outcomes for the uncertain issues at present.
Purchasing power parity (PPP) was the theory of exchange rates developed by Gustav Cassel in 1918. He discussed that the fluctuation of exchange rate is related with price level generally. When prices becomes different, researchers would compare the change of incomes and spending for a wide range of purposes through observation of such comparisons.
In this paper, purchasing power parity would mainly focus on forecasting medium-term real exchange rates, to try to adjust to price differentials in international comparisons of income between Europe and China, in order to measure the future exchange loss as an indicator.
These are more or less equal to forward thinking contracts under functionality, even though they are different in a number of significant attributes. There can be exchange trade of future contract and hence, there is standardization and limitation of initial collateral, maturity dates, contract sizes and a number of other features. Provided that there is availability of futures contract in only specific currencies, maturities and sizes, there is generally not a possibility for obtaining the exact position of offsetting in the absolute elimination of exposures. This technique is trade on the basis of exchange and is known for having a secondary market with higher liquidity that simplifies for unwinding or closing out when there is lack of alignment between exposure timing and contract timing.