Home Add to Favorite Contact Submit  
             19 January, 2021

Category:  Articles » Finances » Currency-Trading


The Forex Market And The Use Of Currency Options

         Views: 1376
2006-12-18 23:29:36     
Article by Donald Saunders

Within the Forex market it is common for traders to use currency options in order to minimize their trading risk. A currency option is simply a contract which gives the holder of the option the right, but not the obligation, to buy or sell a specified currency within a prescribed timeframe. Currency options are also widely used outside of the Forex markets and are particularly favored by companies trading in goods overseas.

Currency options are purchased as either call options or put options. A call option gives the purchaser the right to buy a particular currency, while a put option gives the purchaser the right to sell a specified currency.

The value of an option at its expiry date is equal to the value realized by the holder in exercising his option. If, for example, the purchaser gains nothing, the option is worth nothing. The value at any other time during the timeframe of the contract is said to be its "intrinsic" value and this is the value that can be realized if the purchaser decides to exercise his option.

The intrinsic value of a currency option is linked to what is known as the "strike price" which is the currency price specified in the option contract. A call option (the right to buy) has intrinsic value if the spot, or current, price is above the strike price. A put option (the right to sell) has intrinsic value if the spot price is below the strike price.

If the option contract has intrinsic value it is said to be "in the money", otherwise it is said to be "out of the money". When the strike and spot prices are equal then the contract is referred to an being "at the money" or "at par". Clearly a purchaser would only elect to exercise his option when it is in the money.

The pricing of options is a complex business and takes into account many different factors including both the spot value and time value. The latter is calculated from an expectation of future market conditions and such factors as the difference in interest rates between the currencies in question and the volatility of the market. The important point here is that options must be priced low enough to attract buyers but also high enough to attract writers (those selling and standing as guarantors on options).

In the Forex market currency options are used to offset the risks of unexpected movements in the market and effectively limit a trader's losses to the cost of purchasing the option. The seller of course takes a higher risk as, although he gains a premium on the sale, he also runs the risk of a virtually unlimited risk if the market moves against him.

Forex trades attract a particular form of option known as a "digital option". This form of option pays a specific sum of money at expiry if certain conditions are met. If these conditions are not met then the option pays nothing at all.

For the Forex trader it is simply a question of deciding in which direction the market is likely to move and then deciding upon a payoff should the market move as he expects within a given timeframe.

As an example of a digital option in action let's assume that the Euro is trading today at 1.6700 and that the trader expects that within three months it will be trading at 1.7300 and that he wishes to purchase a digital option. He looks around and decides to buy an option with a payoff of $7,000 at a purchase price of $1,200. If at the end of three months the Euro is trading above his predicted price of 1.7300 then he will receive $5,000. However, if the Euro is trading below 1.7300 he will receive nothing and will have effectively lost his original purchase price of $1,200.

Specialized in: Learn Forex Trading Online - Mini Forex Online - Tax Haven Forex Trading - Real Time Forex News - Forex Trading Mentor - Forex Futures Charts
URL: http://forexonlinetradingsystem.info
Print article      Bookmark this page
Related Articles 
10 Common Mistakes In Trading (Popularity: ): I would like to talk about 10 common mistakes in trading. New traders are often unaware of what is required in trading and the bad habits that can lead to financial suicide.1. Under capitalization - One of the first mistake I made when beginning to trade was being under capitalized. I started with a $10K account without any idea on how to trade. You need enough capital to learn and ...
Best Secured Credit Card Deal - Beware (Popularity: ): Why you should beware of a best secured credit card deal today? If you have been in the credit card market for quite a while and know how the credit industry has evolved and modified in many positive and negative ways, the answers are simple. When you do not have a clue of the ins and outs, it becomes unforgettable to many hard working consumers when they deploy their money ...
Beginner Traders Information on Futures Index Trading (Popularity: ): In 1982 the Chicago Mercantile Exchange brought out the S&P 500 and the life of an index trader was possible. You could buy or sell the equivalent of the 500 largest capitalization stocks in the country, stocks on the New York Stock Exchange, on the American Stock Exchange, on the Nasdaq stock exchange all in one index of 500 different issues. This index was composed of big corporations, utilities, and ...
Beginner Day Traders - Easy Money? (Popularity: ): In day trading you are pitting your wits against every other person in the market. Every dollar you make is on the back of someone else's losses.Every losing trader has failed at trading. Every successful trader has also failed at trading in their past.It is a very rare individual that can make money off capital loaned - the psychological influences will handicap you.Day trading is extremely risky. It's simply unrealistic ...
Day Trading Having "No Fear" to Take the Next Trade (Popularity: ): If you can master this single element, taking the next, the next and the next trade, you will be ahead of 99% of all traders. Having the discipline to repeat your proven strategy, day after day, is the single most important facet of successful trading."When it comes to trading, your fears will act against you in such a way as to cause the very thing you are afraid of to ...

Related Business 
Forex Currency Trading (Popularity: ): Forex trading website that offers comprehensive tips and help for anyone who is willing to invest in online currency trading. One resource stop for all your Forex currency trading needs. How to trade Forex tips. Forex currency trading is one of the most exciting investments available anywhere. Not only because you have the chance to earn huge profits, but because you can do it anywhere, anytime, no matter what profession ...
True Forex (Popularity: ): Forex Portal, including Foreign exchange rates, forex news, currency market forex trading recommendations.
Forex Currency Rate (Popularity: ): The foreign exchange market (forex, FX, or currency market) is a global, worldwide decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends.
Kuasa Forex (Popularity: ): Forex4you offers the best forex trading services in Indonesia. Trade from 2 cents, Asia lowest spreads from 2 pips, lot from 10 USD. Forex is called the foreign exchange market or currency market. Forex is the most traded market in the world, offers trading on a round the clock in both rising and falling markets.
Forex Market (Popularity: ): University of Forex: Forex, Forex Market, Forex Spanish, forex course. Learn to trade forex profitably as a business. We are aware that many unscrupulous people have used to market the concept of exchange market as an opportunity to get rich overnight and feel obliged to clarify these points.
Forex Tribe (Popularity: ): The main goal of Forex-Tribe is to let Traders share technical analysis and trade ideas on the Foreign-Exchange Market. Traders can also check in live all currency pairs or financial and Forex News. Every day, the Forex-Tribe team analyze the main currency pairs and send trading signals. Beginners can learn how to trade Forex thanks to a lot of tutorials. Some Trading tools are really usefull and will help traders ...
Forex Currency Trading (Popularity: ): Forex Currency trading is not a game of chance for stakes with moneywith tremendous odds against you nor is it investing wich minimizes ?risk over a long period of time. Read everything about forex currency trading.
Managed Forex Accounts (Popularity: ): Managed Forex. High-return Forex investing, professional management. Low risk currency managed accounts. forex fund managers. To generate significant medium term capital growth independent of stock and bond markets and within a strict risk management framework. To focus mainly on trading combinations of the major currency pairs in the Interbank spot and forward market.
Forex trading dubai (Popularity: ): The Forex market is several times bigger than all the stock and commodities market put together. Traders usually lock into futures contracts by speculating the rise or fall of one currency in terms of the other.
Forex Currency Converter (Popularity: ): Currency exchange rates for all major currencies converted. Forex currency converter Calculators are all free and can be used online or throughout mobile devices. Find the latest Foreign exchange and currency information for investors, traders and travelers.