Foreign exchange Options


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).

 

 

 

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):

 

 

 

External Links:

 

 

 

Links from KookyPlan: 

 

 

Books about FX trading from Amazon.com