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Currency option with deposit coverage examples. What are currency options

currency option(Currency Option) - a form of urgent transaction of two parties - the seller and the owner, as a result of which the owner of the option receives the right, and not the obligation, to buy from the seller of the option or sell him a predetermined amount of one currency in exchange for another at a conditional or at a rate determined on the day of the exchange. This fixed rate is called the strike price.

The owner of the option has the right to choose whether to exercise the option or refuse it, depending on how favorable the fluctuations in the exchange rate will be for him.

The seller of a currency option is obliged to execute a currency transaction at the exchange rate (strike price) set under the option transaction and ensure that the currency option holder fulfills the terms of the agreement before the end of the specified period. If the transaction is completed, the terms “option exercised” or “option exercised” are used.

Depending on the place of sale, currency options are divided into exchange options that are freely tradable and over-the-counter options. Stock Options(traded option) sell and buy option exchanges, which are a kind of financial institutions that have become an integral part of the financial market economically developed countries. The most famous of them are the London Stock Exchange, the European Options Exchange in Amsterdam, the Philadelphia, Chicago, Montreal.

Exchange options may be traded in the secondary market, freely bought and sold by third parties until the expiration date. They are standardized for certain types of currencies, amounts and due dates. The standard currency option specification contains the following details:

currency name;
the name of the operation (purchase or sale);
currency amount;
exchange rate;
expiration date of the option period;
conditions for exercising a currency option (a certain date or an option period).

OTC Options(Over-the-Counter Option, OTC option - over the counter) can be considered as a purely banking tool. They are sold and bought by the buyer and the bank, as a rule, by individual agreement on a contractual basis and according to a specification that meets the requirements of the buyer. Mostly in the OTC currency options market, banks work with large corporations.

Considering advantages of currency options before other types, it should be noted that their use is beneficial (expedient) in the following cases:

if the time and amount of foreign exchange earnings are not clearly defined;
in order to protect the export and import flows of goods sensitive to price changes;
in case of publication of price lists for their goods in foreign currency;
to support commercial offer to conclude a contract valued in a foreign currency;
if it is necessary to ensure simultaneous insurance of commercial and currency risks.

In world practice, depending on the nature of the currency exchange operation, a currency call option (call) and a put option (put) are distinguished. A currency call option gives the holder the right to buy a certain amount of one currency in exchange for another. A foreign exchange put option gives the holder the right to sell a certain amount of one currency in exchange for another. For example, if an enterprise, having bought a hryvnia currency put option, gets the right to sell the corresponding amount in US dollars in exchange for hryvnia, then this will be a dollar currency put option.

Currency call option mainly used:

for the purpose of a short currency position;
if the exchange rate has a steady upward trend;
for resale for profit.

To use currency put option mainly used for the purpose of:

hedging long;
if the exchange rate has a steady downward trend;
for the purpose of hedging expected receipts and selling currency.

If the option is exercised, the seller of the currency option " call» must sell the currency to the option holder, and the seller of the currency option « put must buy the currency from the option holder. This is a prerequisite for the implementation of a currency option (execution of an option agreement).

From a legal point of view, the participants in an option transaction are always equal. However, from the point of view of the economy, the buyer of the option is in a better position, since the final decision to buy or sell the currency with the expiration date (date) of the option is made by him, paying the option premium for this. The seller of the option has the right only to agree with the decision of the buyer and fulfill his obligations in one of the following forms:

in case of selling a currency call option, the seller of the option must sell the agreed amount of currency to the buyer (owner) of the option;
in case of selling a currency put option, the seller of the option is obliged to buy from the buyer (owner of the option) the agreed amount of currency;
accept the offer of the owner of the option to refuse to exercise it.

The purchase price of a currency option (premium) is determined 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 when selling the option in advance before the completion of the option transaction, regardless of whether it will be carried out at all or not.

The cost of a currency option (premium) is a contractual value and depends on the volume of purchase and sale of currencies, the type of currency, the current exchange rate and the exercise price of the currency option. The latter, in turn, as a rule, depends on the current exchange rate and the prospects for its change, which may be evidenced by data on forward exchange rates published in financial publications, in particular in the Financial Times.

Depending on the expiration time of the option, there are "American" and "European" options (sometimes the terms "American style" and "European style" are used). "European" option(European-type option) can only be executed on the last day of the option period (on a certain date), and "American" option(American-type option) - at any time during the entire option period. In world practice, different countries Both "American" and "European" options are widely used. Practical use option transactions in Ukraine and Russia is still based on the use of the "European" style.

The advantage of using a currency option is that the option holder can avoid significant losses from sharp changes in exchange rates by fixing in advance an acceptable level of exchange rates. If there are no such sharp fluctuations in exchange rates, and the exchange rates remain stable, the owner of the option may refuse to exercise it, and his maximum expenditure in this case will be only an amount equal to the premium. This will be the payment for currency risk insurance.

If the option is terminated, the profit (loss) is determined as the difference between the strike price and the current exchange rate of the sold or bought currency minus the premium.

The general rule for determining the expediency of exercising an option agreement is to compare the current exchange rate on the day the option is exercised with the price of its exercise. If on the expiration day of the currency option the spot rate is lower than the strike price, it is profitable to exercise the put option, and if the current rate exceeds the strike price, the call option. So, we can assume that the profit and risk of the seller of the option are directly opposite to the profit and risk of the owner. The seller of a currency option can receive the maximum profit equal to the amount of the premium if the option is not exercised. If the option agreement is completed, the seller may even incur losses, since he will have to buy (sell) the currency at a rate that differs from the current one in a direction unfavorable for him. However, in practice, due to sufficiently reliable forecasting of exchange rates, this phenomenon rarely happens, and the premium takes into account the possibility of mutual distribution of risks of the buyer and the seller of the option.

To calculate income and possible losses, it is important to determine the exercise price of a currency option. For exchange-traded currency options, it is determined by the option exchange on the day the option expires. Depending on the duration of the option period, several strike price indicators are set. Information about such prices and the amount of the option premium is regularly published in the REUTERS, DOW JONES TELERETE, BLOOMBERG systems.

Depending on the possibility of making a profit or loss, there are:

currency option with a win: a call option with an exercise price below the market (current) exchange rate; a put option with an exercise price above the current exchange rate;
currency option without winning: call and put options, the strike price of which is equal to the current exchange rate;
currency option with a loss: a call option with an exercise price above the current exchange rate; a put option with an exercise price below the current exchange rate.

For European-style options, there are practically no additional choices, since the price and expiration date are fixed in advance. With US options, the buyer and seller gain additional profit opportunities by watching the exchange rate move, since the option can be exercised at any time during the option period.

The main factor determining the size of the option premium is the dynamics of the strike price of the option relative to the current spot rate at the time the option is sold to the owner. The premium will be higher, the more favorable the strike price relative to the spot rate. In any case, if the probability of exercising a currency option is high, the option premium also increases. At the same time, if the owner of the option has paid a significant amount of the premium, it will almost always be more profitable for him to exercise (end) the option in order to minimize losses.

The main elements of an exchange option contract are:

option type ("put" or "call");
style ("American" or "European");
type of currency;
expiration date or length of the option period.

Real economic practice shows that over time, currency transactions are modified, their new forms and varieties appear, which requires foreign exchange market operators to high level organization of their activities. To organize and conduct foreign exchange transactions, large banks create special currency dealing divisions that manage foreign exchange assets by conducting foreign exchange operations. The main purpose of the activity of such units is to regulate the structure of the currency part of the balance sheet and receive additional income.

Each professional investor working on the currency exchange uses a variety of financial instruments. One of the most common are currency options.

Such contracts are used for risk hedging. So it is customary to call a protective mechanism that allows you to significantly reduce the potential dangers to the trader's capital.

A currency option is a futures transaction concluded between the seller and the buyer - the future owner of the option contract. In accordance with existing rules, the buyer of an option receives the right to purchase or sell a certain amount of currency. On the specified date, the underlying asset in question can be exchanged for another currency at the exchange rate fixed at the time of the conclusion of the contract - the strike price of the option.

Currently, there are a huge number of types of such contracts on the market. In fact, their number is limited by the number of national currencies traded on the stock exchange. For example, a currency option may include the exchange of the pound sterling for the Japanese yen, the euro for the Swiss franc, the Australian dollar for the euro, and so on.

The investor should understand the difference between the base currency and the trading currency. If a trader confuses these concepts, then due to such a ridiculous mistake, he can suffer big losses. The trading currency is the monetary unit by which the exercise price of the option contract is expressed. The base currency is the currency that will be sold or bought by the option holder at the time the contract expires.

All currency option contracts have a certain set of essential conditions. These include:

well;
the amount of the asset being sold;
expiration date of the option.

The fixed exchange rate has several names. It is also known as the strike price or strike price.

The amount is usually understood as the number of units of the investment asset being sold. As a rule, the considered option agreements are concluded for a minimum of a thousand units and more. For example, for 3 thousand euros or 7,000 thousand pounds. There is no maximum that limits the sides.

The exercise or expiration date of an option is the date on which the agreement must be exercised.

It is important for a trader to understand that option currency contracts have strict conditions. After their conclusion, the essential conditions described above are not subject to change.

Existing species

The main division of currency options on the market is the classification into Call and Put contracts. In the first case, the transaction is made regarding the purchase of an asset, and in the second case, a sale.

In addition, there are several more classifications that allow subdividing the instruments under consideration into several groups.

Currency option contracts can be exchange-traded or over-the-counter. The first type of instruments involves the completion of a transaction within the framework of the relevant exchange. Such currency options are concluded on standard terms, which are the same for each of the participants in this market.

The second variety implies a special case in which the parties to the option agreement operate outside the exchange. Consequently, they can develop and apply a package of individual conditions for the exercise of a currency option.

In addition, the division of currency options into American and European instruments is important. The European contract is characterized by extreme rigidity regarding the date of its implementation. The parties may sell it only on the date specified by the agreement. The American instrument is softer in this respect. It can be closed at any time up to and including the expiration date.

Trading features

Investors can use currency options for various speculations. At the same time, risk hedging is the most popular strategy for their application in practice.

The Call option is used when there is an uptrend in the market for quotes of the base currency or when you need to hedge a short position. And vice versa. The Put option is designed to provide insurance for a long position or earnings for a trader in the presence of a downward price trend.

Many investors practice the following strategy. They have in their hands a futures contract for the growth of quotes of a particular currency and an option contract for its sale. Thus, they insure themselves against possible market surges.

In such a situation, with the growth of quotes for the underlying asset, the trader receives profit from the futures, but losses from the option. The size of the latter is equal to the cost of acquiring an option contract. Therefore, the size of the final profit of the investor will be equal to the difference, which will be the profit from the futures and the option premium.

Where and how to buy

To gain access to currency options, you need to do a few steps.

We start by opening a client account on trading platform one of the stock brokerage companies.
Download and install free software SmartX. With its help, the investor will be able to carry out a transaction in real time.
An optional step is to get advice from the employees of the selected broker. However, this stage should not be ignored by novice traders.
Acquisition of an option of interest using the SmartX terminal.

This theoretical information is enough to form your own opinion about the essence of currency options and the peculiarities of their use in exchange trading.

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 acquainted with the operations carried out in the currency options markets;

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 owner is called the option seller. 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 that 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 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.

In the course of their activities, banks and participants foreign economic activity actively use trading in currency options (FX-options). FX options help lower currency risks, because they allow you to exercise the right to buy / sell currency at a predetermined exchange rate.

An option is a contract for the right (not the obligation) to carry out a transaction with the underlying asset in a certain period of time. Therefore, the possession of this right is valued at the amount of money paid for the option (premium).

But the financial benefit of being able to control exchange rates is usually many times higher. Therefore, it is currency options that are an effective way to control currency risk. Often, professional participants require specific conditions for concluding a currency option, and the solution is to conclude an over-the-counter option on a currency transaction. In addition, options with a floating expiration date and exercise price are often concluded - FLEX options. But how can non-institutional participants benefit from option contracts based on currency? It's simple:

If a bidder is interested in purchasing a currency at a certain rate in the future, then he can buy a call option with the exchange price of interest to him;
. if a bidder is interested in selling a currency at a certain rate in the future, then he can buy a put option with the exchange price of interest to him.

Trading currency options on the Moscow Exchange

The Moscow Exchange has a section of the foreign exchange market, where deliverable transactions with foreign currency take place in various trading modes. The average turnover of this market exceeds 1 trillion rubles/day. This oldest market MICEX (Moscow Interbank Currency Exchange), inherited by the Moscow Exchange after the merger of MICEX and RTS (Russian trading system). And individuals can make conversion transactions with currency and withdraw funds to their currency accounts just on this market. To do this, you need to open a trading account in brokerage company, which is a participant in foreign exchange trading.

Rice. 1. Assets of the currency market of the Moscow Exchange

But option contracts, the underlying asset of which is the corresponding futures contracts, are also present on the derivatives market of the Moscow Exchange. As for futures, futures are traded on the futures market for currency pairs: US dollar / Russian ruble, euro / Russian ruble, euro against the US dollar, US dollar against the Japanese yen, pound sterling against the US dollar, Australian dollar against the dollar United States, the US dollar to the Canadian dollar and the US dollar to the Swiss franc. Moreover, all these contracts are settlement, as can be seen from the specification. That is, there is no supply / write-off of currency for them - only the transfer of the variation margin is performed. The most liquid futures contract is the US dollar/Russian ruble contract. A daily volume of several million contracts and about a million transactions passes through it.

Rice. 2. Futures on the currency of the derivatives market of the Moscow Exchange

Rice. 3. US dollar futures contract specification

If we compare the dynamics of futures for the US dollar and the dollar / ruble pair in the foreign exchange market, we will see that they are almost synchronous. This indicates the possibility of using options on currency futures of the derivatives market for hedging currency risks and extracting speculative profit from fluctuations in the exchange rate of currencies. Assets may be in slight contango/backwardation (price slightly higher/slightly lower than each other), but in general, their correlation is almost perfect. Even the lot size is the same - both contracts imply a deal with 1000 USD. The essence of the “settlement” of the future is that there is a supply of money (in rubles) by transferring the variation margin, but it, in turn, corresponds to the difference in exchange rate fluctuations, and therefore allows you to control currency risks.

Rice. 4. Comparison of the dynamics of USDRUB_TOD and futures for the US dollar/Russian ruble.

For contracts on currency futures, the following options for currency pairs are presented: US dollar / Russian ruble, euro / Russian ruble and the euro against the US dollar - that is, for the most liquid currency futures.

Rice. 5. US Dollar Options Board - Russian Ruble versus USDRUB_TOD Charts and US Dollar Futures - Russian Ruble

The average cost of a dollar option is 3-3.5% of the value of the underlying asset for the central strike (an option for a month), which is much less than possible price fluctuations. And with the help various methods option trading you can reduce the specified cost to a lower one, which will allow you to more effectively control your currency risks.

Accordingly, by buying call options (green field of the board), you get the right to buy dollar futures during the life of the option. In turn, by buying put options, you get the right to sell dollar futures at the strike price of the option before its expiration.

It is worth noting that it is possible to sell currency options on the derivatives market and earn at those levels where the dollar futures “does not reach” before the option expires (both up and down). It is also possible to build various non-linear structures that allow you to earn on a sharp movement of the currency in any direction, or the non-exit of the currency from a certain corridor.

Conclusion

Options on currency pairs in the derivatives market are not only effective method control of currency risk, but also a way to extract speculative profit from various non-linear (and linear) changes in exchange rates. This kind of hedging is called “cross-industry” (when one highly correlated instrument is hedging an instrument belonging to another market). Otkritie Broker, as a leading participant in currency and exchange trading, will teach you how to effectively reduce currency risks and extract increased profits from currency fluctuations. Register on our portal to start working right now!

A currency option is an agreement between two brokers (dealers). Under this agreement, one broker (dealer) writes and transfers the option, and the other buys it and receives the right, within the period specified in the terms of the option, either to buy at the established rate (strike price) a certain amount of currency from the person who wrote the option (purchase option), or sell this currency to him (sell option).

Thus, the seller of the option is obliged to sell (or buy) the currency, and the buyer of the option is not obliged to do this, i.e. he can buy or not buy (sell or not sell) the currency.

An option is a special form of currency risk insurance that protects the buyer from the risk of an unfavorable change in the exchange rate in excess of the agreed strike price, and gives him the opportunity to receive income if the exchange rate changes in a favorable direction in excess of the strike price.

The growth of the exchange (i.e. current) rate compared to the strike price is called an upside (from the English upside - the upper side). The decrease in the exchange rate compared to the strike price is called a downside (from the English downside - the bottom side).

There are three types of options:

option to buy, or option com (from English call). This option means the right (but not the obligation) of the buyer of the option to buy the currency to protect against (or expect) a potential increase in its rate;

put option, or put option (from shgl.rsh). This type of option signifies the option buyer's right (but not the obligation) to sell the currency to protect against (on the basis of) their potential impairment;

double option (from English put-call option), or rack option (German stallage). This type of option means the option buyer's right to either buy or sell the currency (but not buy and sell at the same time) at the underlying price.

The term is indicated on the option - this is the date (or period of time) after which (which) the option cannot be used.

There are two option styles: European and American.

European style means that the option can only be exercised on a fixed date.

American style means that the option can be exercised at any time during the life of the option.

The option has its own course - this is the strike price (from the English strike price). Option rate - the price at which you can buy or sell a currency, i.e. option asset.

The buyer of an option pays the seller of the option or the writer of the option a commission, called a premium.

The premium is the price of the option. The option buyer's risk is limited to this premium, and the option seller's risk is reduced by the amount of the premium received.

Possession of an option gives its owner the opportunity to react flexibly in case of uncertainty of future obligations. An option trade is not binding on the option owner, so if the option is not exercised, the option owner can either resell it or leave it unused. Currency options are traded on currency markets worldwide, including markets in the US, London, Amsterdam, Hong Kong, Singapore, Sydney, Vancouver and Montreal. In all these markets, three types of currency options are traded.

over-the-counter options of the European type. Such options are written by banks for their clients - exporters and importers in accordance with their needs in terms of the size of the contract and the date of its execution. The bank that wrote the option usually enters into a forward contract with another bank or an option contract with the exchange to hedge its risk;

exchange-traded currency options, which were first traded in the early 1980s on the Philadelphia Stock Exchange;

options on currency futures traded, for example, on the Chicago Mercantile Exchange.

Table 24.7 shows the forms of data on quotations of currency options published in print.

Table 24.7

Philadelphia Exchange Options Option & Underlying CA1IS - LAST PUTS - LAST STRIKE PRICE 31.250 GBP per unit Mar Apr Jun Mar Apr Jun B Pound 158 R R R R 1.44/yr 160.44 159 R R R 1.07 R R 160.44 160 2.00 R 3.55 1.53 R R 160.44 162 0.87 R 2.50 R R R 160.44 163 0.75 R S R R S 160.44 164 0.50 R R R R R

The R symbol means that the option was not traded on that day, the S symbol means that this option does not exist.

It can be seen from the given data that at the current exchange rate of the pound sterling, equal to 160.44 cents per 1l. Art., it was possible to buy options to call or put 31,250 f. Art. with strike price from 158 to 164 cents per 1 f. Art. At the same time, not all existing options were traded on this day, and June options with a strike price of 163 cents per 1 lb. Art. was not on the market.

Example. The currency exchange offers an option to buy US dollars with the following parameters: transaction volume - 10 thousand dollars. USA; term - 3 months;

option rate (strike price) - 27 rubles/dollar. USA; premium - 0.5 rubles / dollar. USA style - European.

The acquisition of such an option allows its owner to buy 10 thousand dollars. USA in 3 months at the rate of 27 rubles. for 1 dollar, i.e. the cost of buying currency will be 270,000 rubles. ($10,000 x 27 rubles).

When concluding an option contract, the option buyer pays the option seller a premium of 5,000 rubles. (10,000 dollars x 0.5 rubles). General costs for the purchase of an option and currency on it amount to 275,000 rubles. (270,000 rubles + 5,000 rubles).

By buying an option, the buyer provides himself with full protection against an increase in the exchange rate. In our example, the buyer has a guaranteed currency purchase rate of 27 rubles. for 1 dollar USA. If the option is exercised, the spot rate is higher than the option rate, then the buyer will still buy the currency at the rate of 27 rubles/dollar. United States and will benefit from the appreciation of the currency in the market. If the spot rate is lower than the option rate on the expiration date of the option, the buyer can forfeit the option and buy dollars in the cash market at a lower rate than the option rate. Thus, it benefits from a depreciation of the exchange rate.

For an option to buy a currency, when it is exercised, the effective exchange rate is

Therefore, the condition under which the exercise of the option to purchase a currency is more profitable (allows you to buy a currency cheaper) has the form:

which is equivalent to the condition Yaa 1 Strategies for trading futures and options are detailed in: WeisweilerR. Arbitration. Opportunities and technique of operations in the financial and commodity markets / Per. from English. M.: Zerich-PEL, 1993. S. 139-144; Stock portfolio (Book of the issuer, investor, shareholder. Book of a stockbroker. Book of a financial broker) / Ed. ed. Yu.B. Rubin, V.I. Soldatkin. M: Somintek, 1992. S. 69-721; Edler A. How to play and win on the stock exchange / Per. from English. M.: KRON-PRESS, 1996.