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 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, buy strike price wh current market price.

An option contract intrinsic value stated ‘in money’, contract wh lose money exercising yr option ‘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 buy 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, selling options, losses me substantial potentially unlimited.

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

Let’s suppose UK pound currently trading 1.58 tt anticipate trading 1.62 3 months time. purchase digital option costs se $600 payoff $4,000. 3 months UK pound trading ae 1.62 tn receive $4,000 trading ls 1.62 receive ng lose original investment $600.

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

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

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