The foreign exchange market and use of currency options

The foreign exchange market and use of currency options

Within the Forex market It is common for traders to use currency options to minimize their trading risk. A currency option is simply an agreement that gives the option holder the right but not the obligation, to buy or sell a particular currency on schedule. Currency options are also widely used outside the Forex markets and are especially favored by companies that trade in goods abroad.

Currency options purchased or call options or put options. Call option gives the buyer the right to buy a particular currency, while put option gives the buyer the right to sell a particular currency.

The value of the option expiry date is equal to the value realized by the holder in exercising his option. If, for example, the buyer gets nothing, the option is worth nothing. The value of any other time during the timeframe of the agreement states that its "internal" and this value is a value that can be realized if the buyer decides to exercise his option.

The essential value of the currency option is associated with what is known as the "strike price" which is the currency option price specified in the contract. Call option (right to buy) has intrinsic value if the spot or current price is above the strike price. A put option (right to sell) has intrinsic value if the spot price is below the strike price.

If the option contract has intrinsic value it says is "money", otherwise it is said to be "out of money." When the strike and spot prices are equal, then the contract is to be "money" or "at face value." It is clear that the buyer would only choose to exercise his option in cases of money.

The pricing of options is complex and takes into account many different factors, including the spot value and time value. The latter is calculated from the expectation of future market conditions and factors such as difference in interest rates between the currencies in question and market volatility. Important point here is that options must be priced low enough to attract buyers, but also high enough to attract writers (those who sell and stand as guarantors of options).

The Forex market currency options are used to offset the risks of unexpected market movements and effectively limit losses to the merchant the cost of buying the option. Sellers of course greater risk, although he receives a premium for selling, he was also a risk of almost unlimited risk if the market moves against him.

Forex trades attract some form of option known as "digital option." This form of the option pays a certain amount of money at expiration if certain conditions are met. If these conditions are not met, then the option pays nothing.

For the Forex trader it is simply a matter of deciding which direction the market will likely move, and then decide on the salary should the market move like he expected within a given timeframe.

As an example of digital option in the action to assume that the euro is trading today at 1.6700 and the trader expects that within three months of trading will be 1.7300 and that wants to buy a digital option. He looks around and decides to buy an option with a salary of $ 7,000 on the purchase price of $ 1,200. If at the end of three months the euro is trading above its predicted price of 1.7300 then he will receive $ 5,000. However, if the euro is trading below 1.7300 it will receive nothing and will have effectively lost the original purchase price of $ 1,200.

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