Managing your FX exposures efficiently
| This is a structured product involving derivatives. The investment decision is yours but you should not invest in the "Currency Option" unless the intermediary who sells it to you has explained to you that the product is suitable for you having regard to your financial situation, investment experience and investment objectives. |
Basically, there are two kinds of Currency Options:
- Call option is the right, but not the obligation, to buy a currency against another
- Put option is the right, but not the obligation, to sell a currency against another
Currency Option provides corporate treasurers another avenue to manage foreign exchange exposure as the foreign exchange risk of the purchaser of options is known and limited to the premium paid out.
Currency Option pricing is dependent on the following factors:
- spot exchange rate
- strike price
- both interest rates of the currency pair
- time to expiration
- expected volatility of the exchange rate
- intrinsic features of the option (whether American or European, vanilla or barrier, etc.)
The price or fee in which the buyer pays the writer of the option is the premium of the option. The decision to exercise the option is dependent on the strike price versus the spot price.
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