Tuesday, April 12, 2011

fxoption vs eq-option popularity among non-retail traders

I spoke to a market data vendor's presales. Let's just say it's a lady named AA.

Without referring to the Singapore market, she feels FXO is clearly more popular as a hedging tool than EqOptions. I feel that's true among her clients (all institutional, no retail). She explains that only large equity funds would use eqo while virtually all importer/exporters would buy fxo (usually from banks). I asked "In that case how do the equity traders hedge their risk if Not with options?" She didn't give a complete answer but cited eq index and futures.

I too feel import/export corporates outnumber equity trading houses (perhaps by a large margin), but I feel eqo is more liquid (thanks to exchanges) and more widespread than fxo. Also, eqo has retail demand.

Our conversation about fxo vs eqo was exclusively focused on the hedging usage. Eqo has other users including traders. I was told some hedge funds also trade fxo, but I feel it's less popular due to exchanges and bid/ask spread.

She felt FXO must be on the books of every corporate (treasury). I asked why. In terms of FX risk hedging, she feels option is the true hedge, whereas fwd is a view on the market. I guess there's some deeper meaning in her remark. Perhaps she means option is an insurance.

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