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 stated ‘in money’, contract wh lose money exercising yr option stated ‘out money’. gain lose contract ‘at money’ ‘at par’.

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

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

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

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

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

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

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