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What are Foreign Exchange Options? What makes it Different?

  • July 2014
  • Posted By Ninoslav

Foreign exchange Options or, Forex options are instruments which give owner only the right to exchange his money from one currency to another. But it does not give you obligation to do that. In a specific day an owner can exchange money at a pre-agreed rate.

There are many kinds of options and foreign exchange options are one of the biggest and liquid markets for any kind of options.

Terms of options
There are many terms of Options and they are described below:
Call option gives an investor the right to buy an asset at a fixed rate on a specific date. Strike price is the price of an asset in which you can exercise options. The put option is opposite to call option as it gives the right to sell any asset and yes of course in a fixed price at a particular date. During the trading price of an asset is known as spot price. Forward price, is that price which will be set in the future.

Traditional options
In traditional options you have to give money to get the right to buy and sell an asset as well as stock. In case of foreign exchange options asset which is in question has also money.

What is hedging?
Generally, these are used to hedge the uncertainty of cash flowing in foreign currency. If foreign currency cash flow is certain, then it is hedged by forwards and in case of uncertain cash flow it is hedged by options.

Now-a-days many fruitful techniques are used to calculate the risk exposure of Options, but it may vary upon assumptions, interest rate curves and many other factors.

To know about wave indicator you may read “What is the use of wave indicator? How it works?”


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