foreign exchange options

foreign exchange options

foreign exchange options - this is a contract that gives the right (but not the obligation) to one of the participants of the transaction to buy or sell a certain amount of foreign currency at a fixed price within a certain period of time. The buyer of the option pays a premium to the seller instead of its obligations to implement this right.
foreign exchange options apply if the option buyer strive to insure themselves against losses, connected with the change of the exchange rate in the location field.
Feature of the foreign exchange options, as the insurance transaction, is the risk of the seller of the option, which arises from the transfer to it of the foreign exchange risk of the exporter or the investor. Incorrectly calculating the course of the put option, the seller runs the risk of incurring losses, which exceed the collected his prize. Therefore, the option seller always keen to cut its rate and increase the prize that may be unacceptable to the buyer.
foreign exchange options is one of the options for full coverage of the currency risks. It can be used as insurance with adverse movements of the exchange rate. In comparison with the forward, option gives better protection against possible risks, because the option buyer reserves the right choice of the implementation or non-implementation of the transaction.