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Forex Options

 

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 Forex Options
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Forex Options

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Forex transactions come in many forms. Each transaction type comes with specific advantages and disadvantages, catering to different scenarios. A smart trader exercise most transaction types which place them at a constant advantage. They can earn significantly if they are aware of these transactions.



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A very popular type of Forex transaction is the Forex options. As the name suggests, this type of Forex transaction will give the trader alternatives which will improve their earnings. Options are one of the four financial derivatives and could be applied to other type of investments. The other derivatives are: forwards, swaps and futures.



Types of Forex Options

Traditional Forex Options

Traditional Forex options is a type of transaction wherein the trader is given the privilege but not the obligation to follow the exchange rate on the agreed date. Through options, the trader will have the privilege in choosing which financial transaction for their advantage. The traders will be at ease no matter what happens in the future.



The traditional Forex option works with a contract wherein there is an agreed strike price on the said date. On the said date or deadline, traders have the option to use the strike price or go with the current market price. Naturally, traders will choose which option is profitable for them.



For example, a company agrees to receive $100,000 after 60 days of the transaction. As the company is based in London, they would have to change that to Euros. But after 60 days, the exchange rate may not be the same and the rate for the US Dollar will go down against the Euro.



To prevent loss, companies would have to enter an option agreement wherein the company would enjoy a strike price stipulated on the contract. On the 60th day, the company that should receive $100,000 will compare the market rate for the said amount to the strike price.



If the US Dollar improves higher than the strike price, then they would keep the amount and exchange it for Euros for a better profit. On the other hand if the Euro improves against the US Dollar, the company will have to keep the strike price for protection.



There are also two types of traditional Forex Options. The first type is the Forex Options exercised in US. This type of option allows the traders to utilize the said privilege in any given time until the expiration date. The second type is the European practice of Forex Option which does not allow any trading except on deadline.



Advantages of Traditional Forex Options

  • Flexibility – This is a feature found in American Forex option as traders will not only enjoy the flexibility on the date of trade but also in the built-in alternatives provided by this type of Forex transaction. 
    .
  • Lesser Premium – This type of transaction is a low cost alternative as everyone could prepare for the incoming transaction.

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Disadvantages

  • Lost Opportunity – As traders have to wait for a significant amount of time before trading commences, the time could be considered as lost opportunity. 
    .
  • Difficulty of Execution – The reason why traditional Forex option takes time is the required paper works and different agreements that should happen before Forex options could be initiated.


Next Page: SPOT Forex Option




Read Next: Forex Money Management



 

 

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