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Currency Options, the ABC and the XYZ
Options on foreign exchange? It's really no different to options on shares or real estate. The basic premise is that the buyer of an option has the right but not the obligation to enter into a contract with the seller. Naturally the option owner exercises this right when it is to his/her advantage. Currency options specify a foreign exchange contract and give the owner the right to enter into the specified contract during a pre-agreed period of time.
Currency Options have gained acceptance as invaluable tools in managing foreign exchange risk. They are used extensively and make up between 5 - 10 % of total turnover. Currency options bring a much wider range of hedging alternatives
to portfolio managers and corporate treasuries.
This area of OzForex is devoted to furthering the understanding of what currency options are, how they are priced and how they can be used.
In the near future we will be bringing options pricing tools onto the site and also a section that simplifies the mathematics behind options pricing.
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