The term forex options refer to a contract in which buyer has the right but not an obligation of selling or purchasing any particular forex spot for defined strike price before the expiry date. In such contract forex options premium means the payment buyer makes to seller for contract rights.
Initially, forex options trading developed as an OTC medium for banks and financial institutions with the aim of forex hedging their exposure to foreign currencies. Another thing about forex options is that it is known as inter-bank market similar to the spot market but with time forex options trading has become common with large corporations as well as individual investors who want to hedge their exposure to other currencies. The advantage of forex options trading is that it provides flexibility in deciding forex hedging and trading strategies to investors.
In forex options transactions buyer can decide whether to sell the contract before it expires or hold it till expiration and then take position in the specified spot forex. The decision to take position in the spot market is commonly known as assignment. The primary obligation of the buyer is to pay the premium amount upfront to the seller at the time forex option is purchased.
Forex options will expire worthless in case strike price is what is known as out or money. Simply it means that spot price is less compared to strike price of call option. If the forex option becomes worthless then both parties; seller and buyer will not have any obligation towards the other.
To conclude we can say that forex trading options are quite useful and proper utilization of forex options can be beneficial for investors. Additionally, having proper information about the roles of buyers and sellers in forex option contracts will guide you in making the right decision at the right time.
#A brief introduction to forex options trading,OctaFX![]() |
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