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 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 purchase 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, purchase option losses wl limited simply price option. However, you’re selling options, tn losses substantial potentially unlimited.

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

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

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

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