In the following sections we will look at forex options, it means one form of contract where buyer holds the right but certainly not obligated to buy or sell a forex spot at given strike price prior to expiry date. Here in this type of contract the premium of forex options refers to payment purchaser makers to the selling party for rights on the contract.
At the beginning trading in the form of forex options started as over the counter or OTC medium used by financial institutions as well as banks with the target of forex hedging the foreign currency exposure they have to bear. It is also called as inter-bank market just like spot market; however with time this type of trading became quite common with individuals as well as large corporate houses using it to hedge foreign currency exposure. Best thing about forex options trading is the flexibility it gives investors in terms of forex trading & hedging strategies they can use.
Forex Option Transactions
Buyers involved in such transactions have the freedom to choose between selling their contract before expiry or waiting till expiration & after it expires take position in given spot forex. Assignment is the term by which choice of taking position in a spot market is known as. The buyer is primarily responsible to make upfront payment of premium amount for forex option purchased.
Forex Options Expiry
Forex options expiry with no value if strike price becomes out of money. This phrase refers to a situation where spot price is low in comparison to call optionӳ strike price. In such cases buyer as well as seller does not have any obligation left against the other.
Values Intrinsic / Extrinsic
1. Intrinsic Value: This value of a forex option is figured out as difference between strike price & contract rate. It is the value that stands for actual value of any forex option in case it gets exercised. However, if forex option is without any intrinsic value then it will be considered to be out of money. On the opposite, in case strike price of forex option is quite close to spot rate then it is known as at the money
2. Extrinsic Value: This term means a forex optionӳ time value & means a number which is beyond a forex optionӳ intrinsic value. The factors used for calculation of this extrinsic value are varied including among others, time till expiration, volatility of spot currency, interest rate for two currencies which is risk free, current spot price on two currencies & strike price. Additionally, as expiration date comes closer the extrinsic value of a forex option wears off. For example, a forex option expires in 60 days then it will have more value compared to a forex option that is going to expire in the next 30 days.
Finally we would like to say that forex trading options are good utility and if properly used, they are very beneficial. In addition to it, if you have good knowledge about the role played by both parties in a forex options transaction then you will be able to take correct decisions in time.