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Currency Options 

Currency Options

 

Currency options are contracts that give the holder a right, not a commitment to buy or sell a given currency at a pre-specified rate during a specified time period. They are used as a way for investors to hedge against unfavorable movements in exchange rates.

In other words, buyers can hedge against risks in exchange rates of foreign currencies by purchasing call or put currency options. Here is an example:

Suppose an investor thinks that the exchange rate represented by the USD to EUR rate will increase. This means dollars will be more expensive for Europeans to buy. If the investor believes that the dollar will rally against the Euro, he or she would want to purchase a call option. That way, the investor could profit from the increase in the value of the dollar against the Euro by buying them at a guaranteed price that ended up being less than the market value everyone else was paying.

Currency options are priced based on pairs, but it is important to remember that no single pair of currencies trades independent of other currency pairs. That is because, when traded in dollars, buying, say, a GBP/JPY pair is actually trading of a GBP/USD and USD/JPY pairs. Hence, the GBP/JPY ratio must be correlated to one or both of GBP/USD and USD/JPY. Some pairs move in lock step, while others move in opposite directions. Knowing which pairs move which ways in relation to each other is fundamental to successfully trading currency options.

 

 

Futures Options
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Currency Options
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Currency Options