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Foreign exchange Options

Page history last edited by Brian D Butler 13 years, 5 months ago

Options

 

Gives you the right to purchase / sell a currency at a certain price (from now, up till an expiration date). You have the right to purchase (or sell), but you dont have to. On the other hand, the other party to this "options" contract is required to buy (or sell) if you ask them to. These "options" can be bought and sold in a market (much like the "futures" can).

 

  • Examples: If you expect to make a payment in the next 3 months, then you might want to purchase a "call option", which will give you the right to buy foreign currency (for you to make your payment) at a specified price. This way, you will be protected if the currency FX rate suddenly changes. At least you will be able to purchase the foreign currency at that price, and to make your payment as needed.

 

  • If, on the other hand, you are waiting for a foreign currency payment to arrive, and you are afraid that a sudden change in the FX rate might decrease the amount of money you will receive, you might want to purchase a "put option" which will give you the right to sell the foreign currency at a certain price (over the specified time period).

 

Pricing:

 

Calls and Puts will be listed with many different "strike prices".   When you see a pricing table, you will see many different rates depending on which "strike price"  you are interested in.  

 

Options Example

 

Example:  Using options to hedge an Account Payable (A/P) due in 6 months.  If there is a supplier in a foreign country (say in Europe) that you need to pay in 6 months, you might be afraid that the Euro might appreciate, making your dollar-based payment higher.  So, to hedge this risk, you could purchase CALL option contracts in order to lock in the rate in the future. 

 

Strike price of 1440 = $1.44 per euro that you want to lock in. 

Then, if it gives you a price of 1.85 for December...that means the PREMIUM is $0.0185 per euro....

 

Contract Size

 

Options = 1/2 the size of Futurs

Example:  Euro/ dollar futures are 125,000 euros per contract

Then, Euro/ Dollar options are 62,500 euros per contract

 

 

 

 

Trading Options (help):

  • first recommendation is always a free website, www.optionseducation.org. This site should be the first stop for investors who want to learn about options. The website is funded by options exchanges so you can trust the information. The site has information about basic strategies, and registration lets you access webcasts and trading seminars. There's even a chatline.

 

 

 

External Links:

 

 

 

Links from KookyPlan: 

 

 

Books about FX trading from Amazon.com

 

 

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