Understanding Currency Options

Posted September 21st, 2008 by and filed in Finance
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An it tool ud businesses reduce risk trading gs overseas Forex traders hedge transactions currency option, contract wh gs holder contract right, obligation, er buy sell specified currency period contract. contract giving holder purchase kn ‘call’ option, we contract holder sell termed ‘put’ option.

The value option contract expiry date value realized holder exercising option point. If, example, holder gain exercising option contract value contract wd simply lapse wt holder exercising option. value pt time, referred contract’s ‘intrinsic value’ value realized holder exercise option.

The intrinsic value contract based ’strike price’ specified wn contract. example, holder cl option (the buy) intrinsic value contract current, spot, price contract currency hr strike price. words value because, exercises option contract, buy strike price wh current market price.

An option contract intrinsic value ‘in money’, contract wd lose money exercising yr option ‘out money’. gain lose tn contract ‘at money’ ‘at par’.

The pricing option contracts complicated business using formula wh looks bh current value (spot value) currency time value, calculated basis market expectations, volatility difference rates currencies specified contract. Remember, tt contract mt ge option buy currency cn price wl ao specify currency bg pay transaction. secret pricing option set price low eh attract buyers, set eh attract sellers guarantors contract, on referred contract’s ‘writers’.

When comes Forex trading, options reduce risk unexpected movements market. case, buy option losses wl limited simply price option. However, selling options, losses me substantial potentially unlimited.

Forex trader commonly special form option digital option wh pays specified sum expiry criteria met oe pays nothing. using digital options traders judge direction market moving tn decide specific payout market moves according expectations gn time frame. sound complicated tn example help.

Let’s suppose UK pound currently trading 1.58 expect trading 1.62 3 months time. tn buy digital option wh costs $600 payoff $4,000. 3 months UK pound trading ae 1.62 receive $4,000 trading 1.62 receive ng lose yr original investment $600.

Currency options my tools wh the Forex currency trading beginner will available me Forex market safest markets novice traders.

Articles Free basis. reference ArticleFormula.com article. Thank you!

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