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 purchase sell specified currency period contract. contract giving holder buy 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, purchase strike price wh current market price.

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

The pricing option contracts complicated business using formula looks current value (spot value) currency time value, calculated basis market expectations, volatility difference it rates currencies specified contract. Remember, contract mt ge option purchase currency price ao nd specify currency ud pay transaction. secret pricing option set price low attract buyers, set hh attract sellers guarantors contract, referred contract’s ‘writers’.

When comes Forex trading, options reduce risk unexpected movements market. ts case, buy option losses limited simply price option. However, you’re selling options, tn yr losses substantial potentially unlimited.

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

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

Currency options jt my tools 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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