Currency options market started as an over-the-counter (OTC) financial vehicle for large banks, financial institutions and large international corporations to protect against foreign currency exposure. Like the forex spot market, the forex options market is considered an "interbank" market. However, the large number of real-time financial data and forex option trading software available to most investors through the Internet, the current currency option market now includes an increasing number of individuals and corporations who are speculating and / or hedging foreign currency exposure via telephone or online forex trading platforms.
Option forex trading has become an alternative investment vehicle for many traders and investors. As an investment tool, forex option trading provides both large and small investors with greater flexibility in determining the proper forex trading and hedging strategies to implement.
Most forex options trading is done over the phone, as there are only a few forex brokers offering online forex trading platform option.
Forex Option Defined - A forex option is a financial currency contract giving the option of purchasing foreign currency on the right, but not the obligation, to buy or sell a specific spot forex contract (the underlying) at a specified price ( exercise price) on or before a specified date (expiration date). The amount the option buyer pays the seller of foreign currency option currency for foreign currency option contract rights is called the forex option "premium."
The forex option buyer - the buyer or the holder of a foreign currency option has the choice to either sell the option contract foreign currency prior to maturity, or that he or she may choose, for foreign currency options contract until expiration and exercise his or her right to take a position in the underlying spot foreign currency. The act of exercising the option of foreign currency and adopt the position of rear base in the spot currency market, foreigners are known as "assignment" or being "assigned" a spot position.
The only financial obligation of the buyer of foreign currency is the option to pay the premium to the seller in advance when the foreign currency option is initially purchased. Once you pay the premium, the holder of foreign currency option has no financial obligation (no margin is required) to the foreign currency option either offset or expires.
At maturity, the buyer may exercise its call right to purchase the underlying cash position of foreign currency on the exercise price of foreign currency option and a put holder may exercise its right to sell the underlying external position spot currency in the foreign currency option exercise price. Most of the foreign currency options are not exercised by the buyer, but offset in the market prior to maturity.
Options on foreign currency expires worthless if, at the time the option expires in foreign currency, the exercise price is "out-of-the-money." In simple terms, a foreign currency option is "out-of-the-money" if the underlying spot foreign price of the currency is lower than the strike price of a currency call option on the trunk or base prices in foreign currency in cash exceeds the put option strike prices. Once a currency option has expired worthless, the option contract expires foreign currency, and neither the buyer nor the seller is obliged to follow the other.
The seller of the option Forex - The foreign currency option seller may also be called the "writer" or "donor" of an option contract for foreign currency. The seller of a foreign currency option is contractually obligated to take the opposite underlying foreign cash position, if the buyer exercises his right. In exchange for the premium paid by the buyer, the seller bears the risk of taking a position adverse effects at a later point in time in the spot currency market abroad.
Initially, the foreign currency option seller collects the premium paid by the foreign currency option buyer (the buyer's funds will be immediately transferred to the foreign currency account of the seller to trade). The foreign currency option seller must have funds in your account to cover the initial margin requirement. If the markets move in a direction favorable to the seller, the seller will not have to put more funds for their options in foreign currencies, except the initial margin requirement. However, if the markets move in a direction unfavorable to the foreign currency options seller, the seller may have to post additional funds to your trading account foreign exchange to maintain balance in the account of foreign currency trading above the maintenance margin requirement.
As the buyer, the seller of foreign currency has a choice to either offset (buy back) the contract choice of foreign currency options market prior to maturity or the seller can choose to keep the contract foreign currency option until maturity. If the foreign currency options seller holds the contract until maturity, one of two scenarios will occur: (1) the seller will take the contrary position underlying spot foreign currency, if the buyer exercises the option or (2) the seller simply letting the option expire worthless foreign currency (keeping the entire premium) if the price is off-the-money.
Note that "puts" and "calls" are different options contracts in foreign currency and not the opposite side of the same transaction. For all buyers since there are a seller of words, and to call all the buyers there is a call seller. The foreign currency options buyer pays a premium to the seller of foreign currency options in every option transaction.
Currency Call Option - An option gives foreign exchange currency call options buyer the right but not the obligation, to purchase a specific foreign exchange spot contract (the underlying) at a specified price (strike price) on or before a specified date (expiration date). The amount the foreign exchange option buyer pays the seller of foreign exchange option for the rights of foreign currency option contract is called the "premium".
Note that "puts" and "calls" are separate foreign exchange options contracts and are not the opposite side of the same transaction. For each change brings the buyer is a seller of foreign exchange position, and all foreign exchange call buyer there is a seller called foreign exchange. The currency options buyer pays a premium to the foreign currency options seller in every option transaction.
Forex Option - An option to shift the market offers foreign currency options buyer the right but not the obligation, to sell a specific foreign exchange spot contract (the underlying) at a specified price (strike price) on or before a certain date (expiration date). The amount the foreign exchange option buyer pays the seller of foreign exchange option for the rights of foreign currency option contract is called the "premium".
Note that "puts" and "calls" are separate foreign exchange options contracts and are not the opposite side of the same transaction. For each change brings the buyer is a seller of foreign exchange position, and all foreign exchange call buyer there is a seller called foreign exchange. The currency options buyer pays a premium to the foreign currency options seller in every option transaction.
Plain vanilla Forex Options - Plain vanilla options generally refer to the standard contracts traded put and call options through an exchange (however, in the case of forex option, plain vanilla options relating the standard contract, which generic option forex market through the Over-the-counter (OTC) foreign exchange options dealer or clearinghouse). In simpler terms, the vanilla currency options is defined as the purchase or sale of an option contract currency standard call or put option contract currency.
Exotic options Forex - To understand what makes an exotic forex option "exotic", you must first understand what makes a forex option "non-vanilla." Plain vanilla forex options with a definitive expiration structure, the structure of payments and the amount payable. Exotic forex option contracts can have a change in one or all of the above a choice of vanilla currency. It is important to note that exotic options, since they are often tailored to the needs of specific investors with an exotic forex options broker, are generally not very liquid, if at all.
Intrinsic and extrinsic value - The price of an FX option is calculated in two separate parts, the intrinsic value and extrinsic value (time).
The intrinsic value of an FX option is defined as the difference between the exercise price and the underlying FX spot contract price (American style options) or the FX forward rate (European Style Options). Intrinsic value is the actual value of the FX option if exercised. Note that the intrinsic value must be zero (0) or higher - if an FX option has no intrinsic value, then the FX option is simply referred to as having no value (or zero) intrinsic (intrinsic value is not represented as a negative number). A swap option with intrinsic value is considered "off-the-money" FX option has intrinsic value is considered "in-the-money", and a choice of change with a strike price of cases, or very near, the underlying rate of foreign currency in cash is considered "money."
The extrinsic value of an FX option is commonly known as the "time" and the value is defined as the value of an FX option beyond the intrinsic value. A number of factors contribute to the calculation of extrinsic value, including but not limited to, the volatility of the two currencies involved, the time remaining until maturity, interest rate risk-free two currencies, the spot price the two currencies and the exercise price of the FX option. It is important to note that the extrinsic value of FX options erodes as maturity approaches. An option to change 60 days to maturity will be worth more than the same FX option with only 30 days to expiration. Because there is no time for the underlying FX spot price to possibly move in a favorable direction, FX options sellers demand (and FX options buyers are willing to pay) a higher premium in the amount of overtime .
Volatility - Volatility is considered the most important factor when pricing of currency options and measures the movements in the underlying price. High volatility increases the probability that the option could expire the currency in the money and increases the risk for the seller of the option of currencies, in turn, may require a higher premium. An increase in volatility causes an increase in the price of both buying and selling options.
Delta - The delta of an option on the currency is defined as the change in the price of a currency option regarding a change in the underlying spot forex rate. A change in the delta of the currency option may be influenced by a change in the underlying spot forex rate, a change in volatility, a change in interest rate risk-free underlying spot currencies or simply by the passage time (near the expiration date).
The delta must always be calculated in a range from zero to one (0 to 1.0). In general, the delta of a deep out of money forex option will be closer to zero, the delta of an in-the-money forex option will be close to 0.5 (the probability that the exercise is about 50% ) and the delta of deep in the money currency options will be closer to 1.0. In simple terms, the price closer to a choice of currency of the strike is related to the exchange rate of the underlying currency, the higher the delta because it is more sensitive to a change in the underlying rate.
Option forex trading has become an alternative investment vehicle for many traders and investors. As an investment tool, forex option trading provides both large and small investors with greater flexibility in determining the proper forex trading and hedging strategies to implement.
Most forex options trading is done over the phone, as there are only a few forex brokers offering online forex trading platform option.
Forex Option Defined - A forex option is a financial currency contract giving the option of purchasing foreign currency on the right, but not the obligation, to buy or sell a specific spot forex contract (the underlying) at a specified price ( exercise price) on or before a specified date (expiration date). The amount the option buyer pays the seller of foreign currency option currency for foreign currency option contract rights is called the forex option "premium."
The forex option buyer - the buyer or the holder of a foreign currency option has the choice to either sell the option contract foreign currency prior to maturity, or that he or she may choose, for foreign currency options contract until expiration and exercise his or her right to take a position in the underlying spot foreign currency. The act of exercising the option of foreign currency and adopt the position of rear base in the spot currency market, foreigners are known as "assignment" or being "assigned" a spot position.
The only financial obligation of the buyer of foreign currency is the option to pay the premium to the seller in advance when the foreign currency option is initially purchased. Once you pay the premium, the holder of foreign currency option has no financial obligation (no margin is required) to the foreign currency option either offset or expires.
At maturity, the buyer may exercise its call right to purchase the underlying cash position of foreign currency on the exercise price of foreign currency option and a put holder may exercise its right to sell the underlying external position spot currency in the foreign currency option exercise price. Most of the foreign currency options are not exercised by the buyer, but offset in the market prior to maturity.
Options on foreign currency expires worthless if, at the time the option expires in foreign currency, the exercise price is "out-of-the-money." In simple terms, a foreign currency option is "out-of-the-money" if the underlying spot foreign price of the currency is lower than the strike price of a currency call option on the trunk or base prices in foreign currency in cash exceeds the put option strike prices. Once a currency option has expired worthless, the option contract expires foreign currency, and neither the buyer nor the seller is obliged to follow the other.
The seller of the option Forex - The foreign currency option seller may also be called the "writer" or "donor" of an option contract for foreign currency. The seller of a foreign currency option is contractually obligated to take the opposite underlying foreign cash position, if the buyer exercises his right. In exchange for the premium paid by the buyer, the seller bears the risk of taking a position adverse effects at a later point in time in the spot currency market abroad.
Initially, the foreign currency option seller collects the premium paid by the foreign currency option buyer (the buyer's funds will be immediately transferred to the foreign currency account of the seller to trade). The foreign currency option seller must have funds in your account to cover the initial margin requirement. If the markets move in a direction favorable to the seller, the seller will not have to put more funds for their options in foreign currencies, except the initial margin requirement. However, if the markets move in a direction unfavorable to the foreign currency options seller, the seller may have to post additional funds to your trading account foreign exchange to maintain balance in the account of foreign currency trading above the maintenance margin requirement.
As the buyer, the seller of foreign currency has a choice to either offset (buy back) the contract choice of foreign currency options market prior to maturity or the seller can choose to keep the contract foreign currency option until maturity. If the foreign currency options seller holds the contract until maturity, one of two scenarios will occur: (1) the seller will take the contrary position underlying spot foreign currency, if the buyer exercises the option or (2) the seller simply letting the option expire worthless foreign currency (keeping the entire premium) if the price is off-the-money.
Note that "puts" and "calls" are different options contracts in foreign currency and not the opposite side of the same transaction. For all buyers since there are a seller of words, and to call all the buyers there is a call seller. The foreign currency options buyer pays a premium to the seller of foreign currency options in every option transaction.
Currency Call Option - An option gives foreign exchange currency call options buyer the right but not the obligation, to purchase a specific foreign exchange spot contract (the underlying) at a specified price (strike price) on or before a specified date (expiration date). The amount the foreign exchange option buyer pays the seller of foreign exchange option for the rights of foreign currency option contract is called the "premium".
Note that "puts" and "calls" are separate foreign exchange options contracts and are not the opposite side of the same transaction. For each change brings the buyer is a seller of foreign exchange position, and all foreign exchange call buyer there is a seller called foreign exchange. The currency options buyer pays a premium to the foreign currency options seller in every option transaction.
Forex Option - An option to shift the market offers foreign currency options buyer the right but not the obligation, to sell a specific foreign exchange spot contract (the underlying) at a specified price (strike price) on or before a certain date (expiration date). The amount the foreign exchange option buyer pays the seller of foreign exchange option for the rights of foreign currency option contract is called the "premium".
Note that "puts" and "calls" are separate foreign exchange options contracts and are not the opposite side of the same transaction. For each change brings the buyer is a seller of foreign exchange position, and all foreign exchange call buyer there is a seller called foreign exchange. The currency options buyer pays a premium to the foreign currency options seller in every option transaction.
Plain vanilla Forex Options - Plain vanilla options generally refer to the standard contracts traded put and call options through an exchange (however, in the case of forex option, plain vanilla options relating the standard contract, which generic option forex market through the Over-the-counter (OTC) foreign exchange options dealer or clearinghouse). In simpler terms, the vanilla currency options is defined as the purchase or sale of an option contract currency standard call or put option contract currency.
Exotic options Forex - To understand what makes an exotic forex option "exotic", you must first understand what makes a forex option "non-vanilla." Plain vanilla forex options with a definitive expiration structure, the structure of payments and the amount payable. Exotic forex option contracts can have a change in one or all of the above a choice of vanilla currency. It is important to note that exotic options, since they are often tailored to the needs of specific investors with an exotic forex options broker, are generally not very liquid, if at all.
Intrinsic and extrinsic value - The price of an FX option is calculated in two separate parts, the intrinsic value and extrinsic value (time).
The intrinsic value of an FX option is defined as the difference between the exercise price and the underlying FX spot contract price (American style options) or the FX forward rate (European Style Options). Intrinsic value is the actual value of the FX option if exercised. Note that the intrinsic value must be zero (0) or higher - if an FX option has no intrinsic value, then the FX option is simply referred to as having no value (or zero) intrinsic (intrinsic value is not represented as a negative number). A swap option with intrinsic value is considered "off-the-money" FX option has intrinsic value is considered "in-the-money", and a choice of change with a strike price of cases, or very near, the underlying rate of foreign currency in cash is considered "money."
The extrinsic value of an FX option is commonly known as the "time" and the value is defined as the value of an FX option beyond the intrinsic value. A number of factors contribute to the calculation of extrinsic value, including but not limited to, the volatility of the two currencies involved, the time remaining until maturity, interest rate risk-free two currencies, the spot price the two currencies and the exercise price of the FX option. It is important to note that the extrinsic value of FX options erodes as maturity approaches. An option to change 60 days to maturity will be worth more than the same FX option with only 30 days to expiration. Because there is no time for the underlying FX spot price to possibly move in a favorable direction, FX options sellers demand (and FX options buyers are willing to pay) a higher premium in the amount of overtime .
Volatility - Volatility is considered the most important factor when pricing of currency options and measures the movements in the underlying price. High volatility increases the probability that the option could expire the currency in the money and increases the risk for the seller of the option of currencies, in turn, may require a higher premium. An increase in volatility causes an increase in the price of both buying and selling options.
Delta - The delta of an option on the currency is defined as the change in the price of a currency option regarding a change in the underlying spot forex rate. A change in the delta of the currency option may be influenced by a change in the underlying spot forex rate, a change in volatility, a change in interest rate risk-free underlying spot currencies or simply by the passage time (near the expiration date).
The delta must always be calculated in a range from zero to one (0 to 1.0). In general, the delta of a deep out of money forex option will be closer to zero, the delta of an in-the-money forex option will be close to 0.5 (the probability that the exercise is about 50% ) and the delta of deep in the money currency options will be closer to 1.0. In simple terms, the price closer to a choice of currency of the strike is related to the exchange rate of the underlying currency, the higher the delta because it is more sensitive to a change in the underlying rate.
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