foreign exchange options
foreign exchange options - this is a contract between a buyer and a seller that gives the buyer the right, but not imposing an obligation, to buy a certain amount of currency at a predetermined price and within a predetermined period, regardless of the market price of the currency, and imposes on the seller (writer) the obligation to transfer to the buyer the currency within a fixed period, if and when the buyer wants to exercise the option transaction.
foreign exchange options - it is a unique trading instrument, equally suitable for trade (speculation), and for the insurance of the risk (hedging). Options allow you to adapt to the market conditions of individual strategy of each participant, that is vital for the serious investor.
The price of the stock options, as compared to prices of other instruments foreign exchange trading, affects a greater number of factors. In contrast to the spot or forwards as high, and low volatility can create profitability at the option of the market. For some options represent more inexpensive instrument of currency trading. For other options imply greater security and accurate execution of orders for closing a losing position (stop-loss orders).
foreign exchange options occupy the rapidly growing sector of the currency
market. Since April 1998. options held by him 5% of the total volume. The largest center of option trading is the USA, followed by the United Kingdom and Japan.
Options prices are based and are secondary to the prices ÐÍÂ. Therefore, the option is a secondary tool. Options are usually mentioned in connection with the strategies of insurance of the risk. For traders, however, it is often typical of confusion about how complexity, and ease-of-use options. There is also a misunderstanding of the opportunities options.
On the foreign exchange market foreign exchange options are possible in cash or in the form of futures. From this it follows that the trade is carried out or «over the counter» (over-the-counter, OTC), or on a centralized futures market. Most of the currency options, approximately 81%, and the traded OTC (see Fig. 3.3.). This market is similar to the spot and swap markets. Corporations can communicate with the banks on the phone, and banks trade with each other, either directly or through brokers. In this form of dealing possible maximum flexibility: any amount of any currency, any term of the contract execution, any time of the day. The number of currency units can be an integer or fractional, and the value of each can be measured as in us dollars and in other currencies.
Any currency, not only that which is available on futures contracts can be traded in the form of an option. Therefore, traders can operate with the prices any of the most exotic currency, which they need, including cross-rates. The validity may be any - from several hours to several years, although in General terms set, focusing on the entire number - one week, one month, two months, and etc. ÐÍÂ works continuously, so the options you can sell literally round the clock.
Trade options on the currency futures contract gives the buyer the right, but does not impose the obligation to possess physically foreign currency futures contracts. Unlike the futures currency contracts for the purchase of foreign currency options are not required to be of primary money supply (margin'a). The value of the option (premium), or the price at which the buyer pays the seller (writer ohms), reflects the General risk of the buyer.
The following seven main factors of influence on the prices of options:
1. The price of currency.
2. Exercise price (strike (exercise) price).
3. The volatility of the currency.
4. Date of expiry.
5. The interest rate differential.
6. Type of contract (put or call).
7. Model option - American or European.
