In the previous chapter, we studied the three main types of contracts that are used in currency exchanges: spot, forward, and futures. This chapter discusses the nature and use of currency option contracts.

Options should be viewed as more complex forms of contracts that govern foreign exchange. We will begin with the characteristics of options trades, given their variety and uses. We conclude this chapter with a discussion of the principles underlying option pricing.

After studying the material in this chapter, you will:

Understand what the essence of an option contract is;

You will be able to understand the varieties of option contracts;

Get to know the operations taking place in the markets currency options;

Understand what general economic principles underlie the use of put and call options, respectively, granting the right to sell or buy such contracts for a fixed price;

Understand what costs and risks are associated with the use of currency options;

Understand what economic factors determine option premiums.

CURRENCY OPTIONS

Forward and futures contracts impose an obligation on the investor to exchange a certain amount of one currency to another at a specified time in the future. The investor must make such an exchange, even if the transaction has become unprofitable for him. But many investors prefer a situation where making a currency exchange is not an obligation for them, but a right: if the planned transaction turns out to be profitable, this exchange should be made; if the transaction is not profitable - refuse to exchange currency.

A contract that provides for such attractive terms is called an option. Under contracts of this type, the investor has the right (but not the obligation) to make a currency exchange. The disadvantage of an option contract is that the investor must pay a high premium to induce the other party to sign such a contract.

Terminology used in options

An option to buy 31,250 British pounds in 3 months at a price of $1.90 per pound gives the option holder the right to buy 31,250 British pounds from the seller of the option. This right is subject to a payment of $1.90 per pound purchased. Therefore, the option holder cannot exercise his right to the pounds without paying them at $1.90 per pound, which is called the strike price of the option. The time when the limiting condition expires (3 months in this case) is called the maturity of the option.

The intrinsic value of an option is the difference between what would be paid for the currency (the market exchange rate) without the option and what would be paid when exercising the option (strike price). For example, suppose 1 English pound is currently selling for $2.00. The intrinsic value of the option is $0.10 per pound (2.00 - 1.90). Because the option does not have to be exercised, its intrinsic value cannot be negative. If the market price of the British pound falls below $1.90, the option's intrinsic value becomes zero.

An option premium is the difference between the market price of an option and its intrinsic value. For example, if an option is sold for $0.15 per pound, the premium is $0.05 per pound (0.15 - 0.10).

TYPES OF CURRENCY OPTIONS

Any two parties may enter into a currency option contract, which will determine, by their agreement, the amount of currency, the maturity and the strike price. Some banks are ready to prepare custom option contracts for their best corporate clients. However, each party is obliged to adhere to the terms of this contract until its expiration date, unless a mutually acceptable replacement for this type of currency exchange is found.

When the number of orders becomes large enough, it becomes possible to organize a secondary market for trading options contracts, similar to the one where transactions with futures contracts take place. In the United States, the Chicago Mercantile Exchange (CME) holds organized sales stock options, and the Philadelphia Securities Exchange - currency.

Close to them options on currency futures contracts are sold on the International currency market. Although this type of option does not refer to a currency, but to a currency future, it makes no practical difference to option traders.

There is currently an organized market in London for currency options, known as European options, which can only be exercised at a specified time. This distinguishes them from American options, which can be exercised ahead of time. There is little difference in pricing European and US currency options, although European and US stock options value differently.

Options traded on an exchange require a standardized contract form and performance guarantee, just like futures contracts. Currency options expire on the Fridays preceding the third Wednesday of the month. The amount of currency in which each option operates is half that set for futures contracts. The Option Clearing Corporation acts as a guarantor for the exercise of currency options.

Bringing currency futures options in line with the characteristics of futures contracts and guaranteeing their performance is carried out by the International Currency Market.

PUT OR CALL OPTIONS

There are two main types of option contracts. Call options give their holder the right to buy a specified amount of foreign currency at a specified price on a specified date in the future. Puma options give their holders the right to sell, on a specified date in the future, a specified amount of foreign currency at a specified price.

If you exercise your right on a call option, you pay the strike price, and on a put option you get the strike price. The other party to the option who is required to fulfill the conditions at the request of the option holder is called the option writer. She participates in the option for a premium to it, which is paid by its future owner.

Consider the actions of an investor who believes that the value of the British pound will increase from the current 1.95 to 2.10 dollars over the next 6 months. But he also knows that there is a possibility that the value of the pound could drop unexpectedly. Since the investor has limited financial resources, he does not want to risk buying a pound futures contract. He calls his broker and inquires about GBP call options due in June. (If this investor thought the value of the pound would go down, he would be interested in put options.) The broker informs him that a call option with an exercise price of $2.00 is currently selling at a premium of $0.0350. Since both the exercise price and the markup are in dollars, the investor instructs the broker to buy one call option and pays (31250) (0.0350) - $1093.75 (using the numbers from the previous example) plus $25 commission for it.

If, as the option's expiration date approaches, the spot price of the pound rises, then the option increases in value. If the specified price goes up, then the value of the option falls. However, in this case, additional investments will never be required, unlike futures transactions. The investor will not lose more than he originally spent on

this option. The only ones exposed here to the risk of indefinite loss are the option sellers, and they alone must enforce the margin or margin requirement.

While foreign exchange options can be held until maturity and then exercised, holders usually sell them early. Suppose the value of the British pound increased to $2.10 in April. The investor cannot, however, exercise his right before the expiration of this option. The intrinsic value of an option, as defined above, is equal to the difference between market value pound and strike price, i.e. (2.10 ~ 2.00) = $0.10 per pound or (0.10) (31250) = $3125. However, options are usually sold for a price slightly higher than their intrinsic value, and so our investor can simply sell his option before the expiration date.

FACTORS DETERMINING OPTION PRICES

Figure 4-1 shows graphs in which the price and intrinsic value of a foreign exchange call option are plotted as functions of the expected spot exchange rate at the expiration date of the option. Both the intrinsic value of an option and its price are expressed in dollars per unit of foreign currency. The actual value and the price of the option, which must be paid for it, are determined by multiplying the value of a unit of currency by the number of its units provided for in the option contract. The intrinsic value of an option is equal to the difference between the current spot rate and the strike price, but can never be negative, since the investor is not required to execute this type of foreign exchange contract. That is why the continuous line in the figure, showing the change in the intrinsic value of the option, does not depart from the abscissa axis and only fixes the option value on it at zero. This happens until the spot rate exceeds the strike price of the option (X). An increase in the British pound spot rate for every pence increases the option's intrinsic value by 1 pence. Therefore, the line showing the intrinsic value of the option rises from point (X), one to one, corresponding to an increase in the spot rate that exceeds the strike price.

The dotted line represents the market price of the option. At all values ​​of the spot rate, the price of the option exceeds its intrinsic value. The difference between the price investors are willing to pay for an option and its intrinsic value is the option premium.

Investors are willing to pay these premiums because there is the potential for large profits if exchange rates appreciate, and the potential losses are limited even if the exchange rate depreciates. When the exchange rate equals the strike price, the option premium is highest.

When the spot rate is below the strike price of the option and there is little chance that it will exceed it, the markup decreases. When the spot rate is higher than the strike price, the markup still decreases because the price of the option, which is equal to the amount of money the holder has invested in it and can lose, rises.

The option premium is also affected by the term of its exercise and the volatility of the value of the foreign currency in which it operates. Since a longer waiting period increases the likelihood that the exchange rate will exceed the strike price, investors pay more for an option with a longer expiration date. Similarly, a currency that changes its value more dynamically is more likely to have an exchange rate above the strike price.

Figure 4-2 shows the intrinsic value and market price of a put option as a function of the expected future spot price. Put options have value only when

the spot rate falls below the strike price. The intrinsic value is equal to the strike price minus the exchange rate. Since the option owner simply decides not to exercise his right in cases where spot rates exceed the strike price, the intrinsic value of the option is not considered negative, but zero.

As with calls, the market price of a put is usually greater than its intrinsic value. Investors are willing to pay a premium on puts for the same reasons as for calls. Their possible income in case of changes in exchange rates before the expiration of the option expiration of the possible losses, which are limited to the initial costs. The premium is maximum when the exchange rate equals the strike price. It is an increasing function, depending both on the expiration date of the option and on the instability of the currency with which the option operates.

WHO BENEFITS FROM CURRENCY OPTIONS?

Currency speculators like options because they carry unlimited potential gains and at the same time clearly limit losses. However, if option ownership is such a profitable business, why are there those who are willing to sell them? The answer to this question is that the value of the premium that the seller of the option receives is commensurate with the risk of possible unlimited losses.

Why do you still need to deal with option contracts? Investors can profit if they have information about future changes in exchange rates that no one else has. Otherwise, the rest of the participants in foreign exchange transactions would also want to make a profit that significantly exceeds the option premium.

While some companies might benefit from such information, they use options primarily for other purposes. Consider a US company that knows that it will receive 31,250 British pounds in 3 months. It is known that if the value of the pound falls below $1.90, this company has a chance of becoming insolvent. The losses caused by the insolvency far exceed the costs associated with the option of £31,250. That is why the company will pay a substantial premium, but avoid the possibility of becoming insolvent.

Currency futures contracts are standardized forward contracts secured with performance guarantees that are traded on the International currency market. Currency options are similar to futures contracts, with the only difference being that the option holder can choose whether to exercise the contract or not. Currency options may include either the right to sell a currency or the right to buy it. In order to induce someone to issue an option, its future owner must pay a premium for it. It depends on variables such as the difference between the strike price of the option and the value of the currency, the volatility of the value of the option currency, and the expiration time of the option. To use or not to use a currency option? The choice depends on the balance between the premium and the possibly unlimited returns that the option can bring.

A currency option is a contract between a buyer and a seller that gives the buyer the right, but not the obligation, to purchase 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) an obligation to transfer to the buyer currency within a specified period, if and when the buyer wishes to carry out an option transaction.

A currency option is a unique trading instrument, equally suitable for trading (speculation) and for risk insurance (hedging). Options allow you to adapt the individual strategy of each participant to market conditions, which is vital for a serious investor.

The prices of options, compared to the prices of other currency trading instruments, are influenced by a larger number of factors. Unlike spots or forwards, both high and low volatility can create profitability in the options market. For some, options are a cheaper currency trading tool. For others, options mean greater security and accurate execution of orders to close a losing position (stop-loss orders).

Currency options occupy a rapidly growing sector of the foreign exchange market. Since April 1998, options occupy 5% of the total volume on it. The largest option trading center is the US, followed by the UK and Japan.

Option prices are based on and are secondary to RNV prices. Therefore, an option is a secondary instrument. Options are commonly referred to in connection with risk insurance strategies. Traders, however, are often confused about both the complexity and ease of use of options. There is also a misunderstanding of the possibilities of options.

In the foreign exchange market, options are available for cash or in the form of futures. From this it follows that they are traded either “over the counter” (over-the-counter, OTC), or on a centralized futures market. The majority of foreign exchange options, approximately 81%, are traded OTC (see Figure 3.3.). This market is similar to the spot and swap markets. Corporations can contact banks by phone, and banks trade with each other either directly or through brokers. With this type of dealing, maximum flexibility is possible: any volume, any currency, any term of the contract, any time of the day. The number of currency units can be integer or fractional, and the value of each can be estimated both in US dollars and in another currency.

Any currency, not just those available in futures contracts, can be traded as an option. Therefore, traders can operate with the prices of any, the most exotic currency that they need, including cross-prices. Any validity period can be set - from several hours to several years, although basically the terms are set, focusing on integers - one week, one month, two months, etc. RNV works continuously, so options can be traded literally around the clock.

Trading options on currency futures gives the buyer the right, but does not impose the obligation, to physically own the currency futures. Unlike futures foreign exchange contracts, the purchase of foreign exchange options does not require an initial cash reserve (margin "a). The cost of the option (premium), or the price at which the buyer pays the seller (writer"), reflects the overall risk of the buyer.

The following seven main factors affect option prices:

1. Currency price.

2. Selling price (strike (exercise) price).

3. Currency volatility.

4. Validity.

5. The difference in discount rates.

6. Type of contract (call or put).

7. Option model - American or European.

Foreign exchange premium - a positive difference between the formal and the current exchange rate.

Types of currency options: call option, put option

An option can be to buy or sell the underlying asset.

A call option is an option to buy. Gives the option buyer the right to buy the underlying asset at a fixed price.

A put option is an option to sell. Gives the option buyer the right to sell the underlying asset at a fixed price.

Accordingly, four types of transactions with options are possible:

§ buy call option

§ write (sell) call option

§ buy Put option

§ write (sell) Put option

Buying a call option

This strategy is most often used when the price of a certain commodity is expected to rise.

In this case, the investor's risk is limited only by his premium - part of the price of the goods. In a situation where he buys 80 calls, the premium is 5. This means that he only risks those five. This means that buying an option involves less risk than buying a specific commodity. However, even in this case, the premium is at risk, so there is a possibility of losing the entire investment, even if the investment amount was small.

Less risk means less income. The profit from buying options is quite small. This is due to the fact that, according to the contract, transactions can only be performed at a fixed price.

Selling a call option

When selling a call option, the seller takes quite a risk because he must provide the goods at a predetermined price, the so-called naked strategy.

With this risk, the maximum profit the seller can make is the premium. So, when he buys 80 calls, the premium is 5. Selling a call to open a position is what is called a short call.

Buying a put option

In this case, as with the sale of a call option, the risk is limited only by the size of the premium. The purchase of an option is made in order to receive income from a fall in the price of a certain asset. The shareholder acquires the right to sell the asset at a fixed price, while he will receive a profit only if the price of the asset falls.

The holder can receive the maximum income from this transaction only if the prices of the goods fall to zero. Buying a put option to open a position is a long put option.

Selling a put option

When selling a put option, the holder takes quite a lot of risk, as he is obliged to deliver a certain commodity at a fixed price. At the same time, if the market price of an asset falls, the seller is forced to pay a large amount of money for the depreciated goods. If the asset price drops to zero, the investor will lose the strike price and premium.

As for the income from the sale of the option, it is made with the expectation that there will be no request for its implementation. Selling a put option to open a position is a short put option.

Option style.

Options differ in style: European option, or European style option (European option, European style) and American option, or American style option (American option, American style).

The main difference between them is that they have different execution conditions in terms of time. Further, it will be possible to see that, due to the influence of such a factor as the life of an option contract, the values ​​(premiums) of European and American options are different.

The European option can only be exercised for a very limited period of time around the option's expiration date. Formally, it is considered that this is the day that is defined as the date of execution of option contracts. However, the practice of placing orders and the reconciliation procedure predetermine somewhat more wide borders, which nevertheless still fit into a certain number of hours that do not expand horizons too much.

The American option can be exercised at any time before the expiration of the option. For such an option, the execution is determined solely by the rules that are in force at the current time in relation to the timing of delivery of the asset underlying it, as well as the capabilities of the broker through which one is carried out. radios on the market. There may also be restrictions on the number of option contracts executed during one trading day. Usually this is 2000 option contracts.

What is such financial instrument enrichment, as a currency option with deposit coverage? What features exist here? What should you focus on when making deals?

general information

Let's deal with the terminology. What is an option? This is a kind of contract that allows you to exchange one currency for another if the deal is winning, and abandon it if it is not profitable. In this case, you can act according to two schemes: "call" (call) and "put" (put). In the first case, it is possible to purchase a predetermined amount of currency on a specific day and at a predetermined price. "Put" provides for the sale on the same terms. Deposit-backed currency options are offered by banks to their clients. They are carefully organized. It includes such instruments as a currency option and a deposit. Why is such a product offered at all? Thus, banks give their customers the opportunity to earn a higher percentage than is offered by conventional deposits. But at the same time, it is necessary to understand that savings are also subject to currency risk.

About the benefits

A standard currency option has the following advantages:

1. Opportunity to receive more significant income than under the terms of a simple deposit.
2. Flexible choice of term, currency pairs, rate and profitability.
3. A short period of placement, usually up to three months.
4. Possibility of remote registration.

Who is it suitable for?

Holders of cash savings, assets and liabilities, who have their own vision of how rates will develop, can try options on currency pairs. Of course, if they are not afraid of risks. When choosing this type of investment, it is necessary to give preference to the base and alternative currency pairs, a carefully chosen period of placement, as well as the exchange rate. What should be invested in? The base currency is used for this purpose. But it can be converted into alternative funds according to the previously set rate. The income received from this transaction is an option premium. It is formed from the difference in exchange rates. The currency options market is quite developed, so if you want to find a niche that is convenient for you, it is not difficult.

What do you need to do to make money?

Suppose the reader is interested in a currency option transaction. What do you need to do to participate in it? On the day of registration of the option, you should:

1. Deposit a certain amount in a pre-selected base currency. As such, the Russian ruble, euro, US dollar, British pound sterling, Chinese yuan or Swiss franc are most often used. Options may vary slightly between financial institutions.
2. The second currency is selected.
3. The placement period is set. As a rule, a range from seven to ninety days is available.
4. The exchange rate is negotiated, as well as the premium for the currency option. Remember that the larger the amount you claim, the higher the risks.

When the day of determining the option comes, then there are several options for further action:

1. If the exchange rate is less profitable or equal to the one determined at the time of the conclusion of the contract, then on the day of return the person claims to receive the amount of his investments, interest on the deposit, as well as an option premium in the base currency. Alas, this is a failure.
2. If the rate is more profitable than the one determined by the person, then he receives all the amounts due to him Money in alternative currency.

Let's say a word about the award

Probably, now many readers are interested in one question. How is the option premium determined? The task of paying out cash is entrusted to the trader who purchases the option. Such an option for investing funds, together with the interest accrued on the deposit, will allow you to receive high income. Of course, if there were corresponding movements in the market. Let's look at a small example to explain how this system works. Suppose a person has an assumption that the value of the euro will increase from 90 to 95 rubles in a week. Since it assumes the growth of the currency, the choice is made in favor of call options. Then they are bought from a broker, often accompanied by certain surcharges. But let's not talk about them for now. If the rate really rose, the value of the option also increases with it. At the same time, no additional investments are required from a person. The option itself can be stored until the end of its term, or it can be exercised at any convenient moment before the end of the agreements.

About individual moments and development

The tool considered in the framework of the article is constantly changing and improving. There is even something that was not there before. One of the latest developments is binary currency options. This is such an amazing transformation of securities that one can hardly see their ancestors in them. What is their feature? Initially, any asset is completely thrown out of circulation. The main object here is the price. Traders are interested in its behavior over a certain period of time, and that is what they bet on. If they think that the price will rise, then they take a “call”, if they think it will fall, they take a “put”. You see, even these words have lost their original meaning. At the same time, the price of an asset does not depend on its behavior. In this case, the most interesting percentage value at the time of the agreed day to the amount of the rate. This is what the premium is based on. The more bet, the greater the win, as well as the risk of losing money. If the investor's bet has not played, then the premium remains with the broker. As you can see, binary currency options provide that only one side will win.

How to make a profit?

The considered financial instrument attracts a large number of speculators of all stripes. Well, this is not surprising, because it allows you to get huge incomes. And at the same time, the probable losses are clearly recorded. But if this is such a profitable business, then why are there those who are ready to sell currency options? And the answer is simple: the amount of premium that the seller of the option receives is commensurate with the risk of unlimited losses. Does it make sense to get involved in this whole story? Theoretically, it is quite possible to become a successful bidder. To do this, you only need to be the first to know about all fluctuations in the exchange rate, be able to predict its changes and have information that others do not know about. Otherwise, it will be very difficult to compete. It should be understood that financial activity has significant risks. Here are some examples:

1. The price of transactions is overstated in comparison with other types of investments.
2. You must have a deep knowledge of finance, as well as relevant experience. Currency options are difficult to implement, and it is impossible for everyone to succeed in this area.
3. It should be borne in mind that such an investment is extremely time-bound. Therefore, many contracts remain unfulfilled.

As you can see, making money in this case is not so easy as it might seem at first glance. Whether it is worth risking your money, time and nerves - everyone decides for himself. The main issues have already been considered, let's pay attention to additional points.

Administrative difference

Initially, currency options began to be used in Europe. But over time, they gained great popularity in America. Now they are also widely used in Asia. At the same time, depending on geopolitical attachment, their own characteristics. The most popular now is the American model of interaction. Its feature is the possibility of early execution of rights. The European model aims to generate average incomes with minimal risk. Asians perceive an option as a specific commodity, which should have its own price. For this, exchanges are widely used.

What to play?

People who have decided, but have not yet begun to act, are for the most part interested in the question: what are the best currency pairs for binary options exist? Unfortunately, there is no 100% correct answer here. To do this, you need to be aware of the many different trends, specific moments and other elements of successful investing.

Let's look at a small example. Here we have the euro, US dollars and yuan. What can be said in this case? The most predictable pair is the dollar and the yuan. The Chinese government supports the export economy. And for this you need a cheap own currency. Therefore, they constantly depreciate the yuan against the US dollar. But this is not all possible field of activity. Other interesting currency pairs for binary options are euros and dollars, as well as the money of the European Union and the yuan. True, it is impossible to accurately predict here. So, now the euro exchange rate against the dollar is growing, although just a year ago it was steadily falling. And it was seriously believed that the euro would become cheaper than the dollar.

Conclusion

You must be aware that financial activities involve enormous risks. There are always losers and winners in it. And if you do not have the necessary knowledge, experience, acumen, then there is a very high probability of falling into the first category, the losers. This topic is quite broad and requires considerable preparation. One could also talk about barrier and range currency options and other financial instruments. But to fully cover this topic, even speaking in passing, the size of the article is not enough. Even one book will not be enough. For people who want to lead a successful financial activity, it is possible to obtain a full higher education which now takes four years. Yes, not all the information that is taught is useful, but consider whether it is worth competing with those who have studied well and have a good understanding of financial processes.

2) Subjects of the foreign exchange market:

2) Operations and payments for export (re-export) and import (re-import) of goods and services.

5) Investment foreign exchange operations:

Topic 2. Law No. 173 fz "On currency regulation and control in the Russian Federation", its main provisions and their practical implementation

Topic 3. The classification status of the currency according to the degree of its real convertibility into foreign currency and currency values

Topic 4

Exchange rates

Course setting method

2) Floating rates:

Bank rate - the amount of payment to the bank for the use of services, expressed as a percentage of the transaction.

Topic 6. General characteristics of the currency exchange (MICEX) and exchange currency turnover

History of the exchange

Ancient history:

Stock market

2) Urgent:

Unsterilized foreign exchange intervention - intervention in the foreign exchange market, in which the central bank does not isolate the domestic money supply from foreign exchange transactions.

Section 3. International trade settlements and current, cash, conversion and currency exchange operations

Topic 7. Cash and term forward currency transactions: general provisions. Currency position for commercial banks, currency dealers and economic organizations (various types)

Topic 8. Current currency settlements and trade payments. Non-documentary and documentary foreign exchange transactions. Non-trading foreign exchange transactions. Investment and capital foreign exchange transactions

C) Settlements by check and promissory note:

Types of securities

Capital operations

Topic 9. Basic classification of cash transactions

Topic 10. Procedure and mechanism for concluding and implementing spot transactions and contracts

Section 4. Term forward foreign exchange contracts and their basic modifications

Topic 11. Urgent currency transactions and contracts. Basic rules and requirements for their conclusion and implementation

Hedging types

Topic 13. The mechanism and rules for calculating the term forward exchange rate: the market (operational) exchange rate and the theoretical term forward rate (by the formula)

Topic 14. Currency option and option currency strategies

Topic 15. Operations and swap contracts

5) Banks operating in the official and unofficial markets receive the highest income from transactions with derivatives.

Topic 16. Currency arbitrage and its basic modifications

Topic 17. Currency futures. Futures trading. Calculation and use of variation margin. financial futures

Futures specification - a document approved by the exchange, which sets out the main terms of a futures contract.

Section 5. Multilateral international currency transactions

Topic 18. International currency settlement and currency-credit operations (transactions)

Topic 19. Procedure for registration and mechanism for the implementation of international currency transactions

Topic 20. Main types and forms of currency dealing and multilateral international currency transactions

Topic 14. Currency option and option currency strategies

Dealswith Option(lat. optio - choice, desire, discretion) - an agreement under which a potential buyer or potential seller acquires the right, but not the obligation, to purchase or sell an asset (goods, securities) at a predetermined price at a future moment specified by the agreement or over a certain period of time. An option is one of the derivative financial instruments.

Option premium is the amount of money paid by the buyer of an option to the seller when concluding an option contract. In economic essence, the premium is a payment for the right to make a deal in the future.

Options transactions are fundamentally different from forward and futures transactions. There are two parties involved in an option transaction: the option seller (option writer) and the option buyer (option holder). The option holder (buyer) has right, not an obligation to complete the deal.

Unlike a forward, an option contract is not binding, its holder can choose one of three options :

execute the option contract;

leave the contract without execution;

sell it to another person before the option expires. The writer of the option assumes the obligation to buy or

The purchase price of an option (premium ) is defined as a percentage of the amount of the option agreement or as an absolute amount per unit of currency and is paid by the buyer at the time the option is sold well before the end of the option agreement, regardless of whether it is exercised at all or not.

The cost of the option (premium) is a contractual value and depends on the volume of buying and selling currencies, the type of currency, the current exchange rate and the exercise price of the option. The latter, in turn, as a rule, depends on the current exchange rate and the prospects for its change, information about which can be provided by data on forward exchange rates published in financial publications.

In any case, the exercise price is calculated in such a way that both the buyer and the seller have a certain benefit after the option expires.

Mechanism for exercising options with securities. The procedure for concluding and implementing option contracts on currency and stock exchanges.

Rules and mechanism for calculating and fixing an urgent option exchange rate in a contract. Basic methods of calculation. Modern option strategies and their modifications. a brief description of various diversified option strategies, their goals and methods of practical implementation.

There are options:

for sale (put option) - Gives the option buyer the right to buy the underlying asset at a fixed price;

to purchase ( call option ) - Gives the option buyer the right to sell the underlying asset at a fixed price;

bilateral ( double option ).

The most common options are of two styles - American and European.

American option can be redeemed on any day of the term before the expiration of the option. That is, for such an option, the period during which the buyer can exercise this option is set.

European option can only be redeemed on one specified date (expiry date, exercise date, redemption date).

Accordingly, four types of option trades:

buy call option;

write (sell) call option;

buy put option;

write (sell) a put option.

Option term(expiration period) is the point in time at the end of which the buyer of the option loses the right to buy (sell) the currency, and the seller of the option is released from his contractual obligations.

The underlying value of the option- this is the price for which the buyer of the option has the right to buy (sell) the currency in the event of the implementation of the contract. The base value is determined at the time of the trade and remains constant until the expiration date.

The price of an option depends on a number of factors:

base price (strike price);

current exchange rate (spot);

volatility (volatility) of the market;

the term of the option;

average bank interest rate;

the ratio of supply and demand.

The option price includes:

internal (real) value;

external (time) value. intrinsic value option is determined by the difference between its

A currency option is a contract concluded between the seller (it is customary to call him a writer) and the buyer (holder) of the option. In accordance with the contract, the seller is obliged to buy or sell a certain amount of currency at a set price at any time, up to the expiration of the contract. As for the option buyer, he acquires the right to buy or sell the currency at the price set by the contract only if it is profitable for him. This is the most important difference between options on the one hand and forwards and futures contracts on the other. Indeed, forward and futures contracts must be executed in any case, both parties must settle with each other on the day the currency is delivered. A different situation arises in the case of a currency option, which gives its holder the right, but by no means the obligation, to make a currency transaction in the future at a predetermined rate.

Currency options form a relatively young segment of the urgent currency supply market. Options trading in the modern sense of the term has been conducted in the United States since 1981. The largest center for such trading is the Philadelphia stock Exchange. Prior to that, there was a market in Europe where they traded a special type of options issued by large banks (over-the-option). Distinguish between buy options and put options. Buyer options (call option) give the buyer the right to buy foreign currency at the underlying price or the exchange rate of the option. Seller options (pull option) give the same right to the buyer, but not to buy, but to sell foreign currency. Options are traded on a 9-month cycle. The option expires on the Saturday before the third Wednesday of the month if paid on the same Wednesday. Depending on the estimated payment term for the supply of currency, a European option and an American option are distinguished. European option (european option) can only be paid on the expiration date of the contract. An American option provides the buyer with greater freedom of choice, allowing the trade to be made throughout the life of the contract, including the day it is settled. Operations in the futures foreign exchange market are carried out in order to profit from the exchange rate difference between currencies. Unlike forward and futures contracts, an option allows you to reduce the risk arising from adverse changes in exchange rates, and retains the possibility of making a profit in the event of favorable developments. The cost of an option is calculated on the basis of the so-called option premium, which is a fixed amount, for example, in cents, paid for each unit of foreign currency - pounds sterling, Canadian dollars, Japanese yens, etc. In order to determine the price contract, you need to multiply the premium by the amount of foreign currency represented in the contract.