Foreign Exchange Option

Foreign exchange option or currency option is similar to any other option that is available in the securities market or in the real estate sector. The currency option provides the buyer of the option with the right to move into an agreement with the seller. An important thing is that the buyer has no obligation to exercise the option and exercising the right depends entirely on the desire of the currency option buyer.
The time limit of the foreign exchange option or currency option remains pre-decided and after that time limit the option expires . The foreign exchange option or currency option is very useful in managing the risks related to the process of foreign exchange. These options are in high demand among the portfolio managers as well as among the corporate treasuries because these options add too many alternatives in the process of hedging.

There are several types of options that are provided as foreign exchange option or currency option. Among these, call option and put option are the two basic options.

The call options provide the option holder with the opportunity to buy a particular currency at a definite rate before the expiry date of the currency option. This may be very helpful and can be productive at times because if the value of that particular currency is high then also the option holder can buy that at a pre-decided rate and then the currency can be sold at the existing high rate.
On the other hand, the put as a foreign exchange option or currency option is also very popular and offers the option holder the right to sell a particular currency at a particular rate. Now if the existing market rate of that particular currency is falling then the put option holder can make good profits from the market.

The premium of foreign exchange option or currency option depends on several factors. Intrinsic value of an option plays a major role in determining the premium rate of that option. The intrinsic value of an option denotes that the current market rate is not as favorable as the strike price of that particular option. On the other hand, if the option has no intrinsic value, then time value is used to determine the premium of that option.

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Last Updated on : 1st July 2013

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