Description of the Forex options market

The currency options market began as an over-the-counter (OTC) financial vehicle for large banks, financial institutions, and large international corporations to hedge against currency exposure. Like the spot currency market, the currency options market is considered an "interbank" market. However, with the vast amount of real-time financial data and currency options trading software available to most investors via the Internet, today's currency options market includes an increasing number of individuals. and corporations that speculate and / or hedge foreign currency exposure over the phone or online currency trading platforms.

Forex options trading has become an alternative investment vehicle for many traders and investors. As an investment tool, currency option trading provides both large and small investors with greater flexibility in determining currency trading and the appropriate hedging strategies to implement.

Most forex trading is done over the phone, as there are only a few forex brokers offering online forex trading options trading platforms.

Defined Forex Option: A Forex option is a financial currency contract that gives the buyer of the Forex option the right, but not the obligation, to buy or sell a specific Forex Spot contract (the underlying) at a price specific (the strike price) on or before a specific date (the expiration date). The amount that the buyer of the forex option pays to the seller of the forex option for the rights to the forex option contract is called the "premium" of the forex option.

The Forex Option Buyer: The buyer or holder of a foreign currency option has the option to sell the foreign currency option contract before expiration, or may choose to hold the foreign currency option contract until expiration and Exercise your right to take a position in the underlying spot foreign currency. The act of exercising the foreign currency option and taking the subsequent underlying position in the foreign currency spot market is known as the "allocation" or "allocation" of a spot position.

The buyer's only initial financial obligation for the foreign currency option is to pay the premium to the seller in advance when the foreign currency option is initially purchased. Once the premium is paid, the holder of the foreign currency option has no other financial obligation (no margin required) until the foreign currency option is cleared or expires.

At the expiration date, the buyer of the call option can exercise his right to buy the underlying spot position in foreign currency at the exercise price of the foreign currency option, and a put holder can exercise his right to sell the position. underlying spot in foreign currency at the exercise price of the foreign currency option. Most options in foreign currency are not exercised by the buyer, but are cleared in the market before expiration.

Foreign currency options expire worthless if, at the time the foreign currency option expires, the strike price is "out of the money." In simpler terms, a foreign currency option is "out of the money" if the underlying foreign currency spot price is lower than the strike price of a foreign currency call option, or the underlying foreign currency spot price is more higher than the strike of a put option price. Once a foreign currency option has expired worthless, the foreign currency option contract expires and neither the buyer nor the seller has any other obligations to the other party.

The Forex Option Seller: The foreign currency option seller may also be called the "writer" or "grantor" of a foreign currency option contract. The seller of a foreign currency option is contractually bound to take the opposite underlying spot position in foreign currency if the buyer exercises his right. In exchange for the premium paid by the buyer, the seller assumes the risk of taking a possible adverse position at a later time in the spot currency market.