Option Types - Overview

As the currency option market has become more sophisticated, a number of option types have arisen to suit a variety of hedging and trading needs. Although the majority of these types fall into just a few main categories, more complex and tailored option structures can be engineered from these basic building blocks to meet the specific requirements of option users.

Vanilla Currency Calls and Puts

In every foreign exchange transaction one currency is bought and another is sold, and so this exchange is also reflected in the nature of currency option transactions. A standard or “vanilla” currency call option is the right to buy that currency, and a currency put option is the right to sell that currency. Nevertheless, each currency option is both a call and a put since a call option on one currency in a particular currency pair is also a put option on the other currency involved.

Knock-Out Options

Knock-outs are similar to vanilla options except that they are extinguished or cease to exist if the underlying market reaches a pre-determined trigger level during the lifetime of the knock-out option. Due to the risk of cancellation, the knock-out component generally makes knock-out options cheaper than the corresponding European-style option, and this discount will increase the closer the trigger level is to the prevailing market.

Knock-In Options

Unlike knock-out options that can get cancelled, knock-in options do not come into existence until the underlying market reaches a certain pre-determined trigger level or “knock-in rate.” Once the trigger level is reached, the knock-in option takes on all the usual characteristics of a European-style option. Due to the risk never being knocked-in, knock-in options are generally cheaper than the corresponding European-style option, and this discount will decrease the closer the trigger level is to the prevailing market.

Average Rate and Average Strike Options

Average rate options have their underlying spot rate determined by an averaging process, while average strike options have their strike price determined by an averaging process. Such a process might involve taking the average of underlying price samples at a certain time of the day at the end of every month or other time period.  The payoff on such options is determined by calculating the positive difference between the averaged underlying value observed and the fixed strike for average rate options, or between the averaged strike and the underlying market at expiry for average strike options.

Basket Options

A basket currency option is an over-the-counter product that has all the characteristics of a vanilla currency option, except that the strike price and the underlying rate are based on the weighted value of the component counter currencies, calculated in the option's base currency. In order to transact a basket option, one needs to specify the maturity of the option, the foreign currency amounts which make up the basket, the base currency, the strike price expressed in units of the base currency, and whether the option is a call or a put on the base currency.

Make an enquiry
* Denotes a mandatory field.
(Country code/Area code/Number)

Currency Converter

Rate: 0.9838
=
Rate: 1.0165
=
Go
See My FX Dashboard for more info

Register Free

Registration is quick and easy. Access live customer rates, free tools and make international payments.

Register today
Already registered? Login
Get our free commentary
Stay on top of the news with updates from our expert dealers on the latest currency movements. You can unsubscribe any time and your email address is safe – see our >Privacy Policy.


Keep me up to date:
Get free rate alerts
Choose ccy pair and enter the exchange rate. An alert will be triggered when the exchange rate is reached and an email will be sent to you. You can unsubscribe any time and your email address is safe – see our Privacy Policy.
select
/
 


Mobile Forex trading tools

Make money transfers or currency conversions on the go via our mobile site, iPhone or Android apps. Learn more here

Banners

Sitemap

You're in good hands:

  • TRUSTe online privacy certification
  • AFMA Full Member of AFMA
    (Australian Financial Markets Association)

IMPORTANT: This information has been prepared for distribution over the internet and without taking into account the investment objectives, financial situation and particular needs of any particular person. OzForex makes no recommendations as to the merits of any financial product referred to in this website, emails or its related websites. Please read our Product Disclosure Statement and our Financial Services Guide.

DISCLAIMER: OzForex makes no warranty, express or implied, concerning the suitability, completeness, quality or exactness of the information and models provided in this web site. Read full disclaimer.

OzForex provides international money transfer services to private clients and business customers. Use our free currency converter, exchange rate charts, economic calendar, in-depth currency news and updates and benefit from competitive exchange rates and outstanding customer service.

Regulated in Australia by ASIC (AFS Licence number 226 484) © 2011 OzForex Pty Ltd ABN 65 092-375-703. Read our Money Laundering Statement.