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Currency Options

  • Date Submitted: 06/19/2011 09:54 AM
  • Flesch-Kincaid Score: 60.9 
  • Words: 689
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Topic: Currency Options

  Currency option is a contract or an agreement which gives the right to buy or sell currency at a pre-specified exchange rate on a future date. Currency options are derivatives contracts in which foreign currency is the underlying asset. Currency options are also known as forex options or Fx options. The contract is between a buyer and a seller and gives the buyer the right but not the obligation to buy or sell the underlying foreign currency at a specified price on an agreed upon date in the future. There is an expiration date on the contract so there is a time factor. In addition, the option comes at a cost. The fee that the buyer pays for the option is called the premium. The price that is specified for either buying or selling at the future date is known as the strike price.

  There are two types of contract when it comes to price movements, the call and put option. A call option is when you expect the price of the currency pair to rise. The buyer of a call option has the right to buy the underlying currency at an agreed upon price at a future date. A put option is the opposite, when you expect the price to decline or you are trying to profit from a price going down. A put option provides the buyer the right to sell the underlying currency. While currency options give the buyer the right to buy or sell the underlying currency, there is no obligation to do so. However, the seller of the currency options is obligated to buy or sell the underlying currency in case the buyer decides to exercise the option.

  Currency option trading is a strategy that many traders use to make profits and hedge their risks on the forex market. You can use it purely to speculate or you can use it to limit your losses in this risky market. This option suits many businesses that want to protect themselves from unfavorable rate changes while retaining the flexibility to benefit from advantageous ones.
There are many benefits to trading currency options....

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