Currency option – it is a contract between a buyer and a seller that gives the buyer the right (but not imposing the obligation) to acquire a certain amount of currency at a predetermined price and within a predetermined period of time regardless of the market price of the currency and imposes on the seller (writer) the obligation to transfer to the buyer currency within the prescribed period, if and when the buyer wish to exercise the option transaction.
Currency option – it is a unique trading tool, it is equally suitable for trading (speculation), and insurance risk (hedging).
On option prices, compared with the prices of other instruments of currency trading, affects a greater number of factors. In contrast to the spots or forwards as high and low volatility can create profitability in the options market. Options traders and are considered as a cheaper currency trading tool, as a tool, featuring greater security and ensuring precise execution of orders on closing a losing position (stop-loss orders).
Currency options occupy a rapidly growing sector of Forex. Since April 1998, options to take it at least 5% of the total. The largest center of option trading is the U.S., followed by the United Kingdom, and Japan. Option price based on the prices of spots and are therefore secondary market instrument.
In the currency market, options transactions may be in cash or in the form of fyuchersov. This implies that trade is carried out by them or “over the counter» (over-the-counter, OTC), as SPOT, or on a centralized fyuchersnom market. Most of the foreign currency options, about 81%, trading by OTC. According to the technology of the transactions by traders this market is similar to the spot market and swaps – trade is carried out with each other directly or through brokers. Transactions occur with any amount of any currency to any terms of the contract, at any time of the day. The number of units of currency can be an or a fraction, and the cost of each can be measured in both U.S. dollars and in other currencies. The contract period can be set either – from a few hours to several years, although mostly set deadlines, focusing on the integers – one week, one month, two months, etc.
Unlike futures foreign exchange contracts for the purchase of foreign currency options does not require entry of the money stock (“margin”). Value of the option (premium), or the price at which the buyer pays the seller (“writer”) reflects the overall risk of the buyer.
On option prices affect the currency price, sales price (strike (exercise) price), currency volatility, the term of the contract, the difference in interest rates, type of contract (call or put) option and model – an American or European. Price of the currency is a major component of the price-setting option transactions, and all other factors are compared and analyzed, taking into account that price. That change in currency prices cause the need to use the option and the impact on its profitability.