What are Currency Options

The currency or forex option is prevalent in the forex market and offers the investor with better vehicles.  A currency option can be defined as a derivative where its value is derived from an underlying asset, which is basically a foreign currency.
A currency option or Forex option operates in the form of call (buy) or put (sell) options which is derived from buying & selling of a currency pair at an agreed strike price on the stated expiration date.
Forex options trading was basically practiced by large companies which included fund managers, portfolio managers and corporate treasurers hedging the risks arising due to currency exposure in the forex option market. However, the forex market has seen a lot of exposure in the past few years especially after the introduction of electronic trading and better market access, and hence the currency options trading has become an apt instrument within the investor community.
Initially the currency options were traded Over the Counter (OTC). This was done by the traders/dealers who would trade with each other over the phone and the primary concern was to restrict the risks arising due to currency exposure. OTC trading was a wiser option for large institutions dealing in millions or billions.
Since the electronic media is used predominantly in all sections of the business community, esp. the forex market and other investment industries, it has outperformed all other tools of access these days. Hence the resort has become currency options trading online.

Online Currency options trading offers the investors with various options. A few can be listed as:

  • Interactive brokers,
  • GCI trading.
  • Saxobank,
  • CMC Forex
  • FXCM,
  • Refcospot
  • MAN Direct,
  • How much is the risk involved?

The risk quotient while trading in currency options can be classified into two categories:

  1. Counter party risk
  2. Market risk

The counter party risk can be associated when the trading is done OTC. As there is a large firm involved and the party on the other side of the transaction may fear the risk of not delivering the financial obligation related to the foreign currency.
On the other hand, the market risk captures the sensitive macroeconomic paraphernalia of the currency options trading. The political and economic factors play a major role in the performance of the currency options rather than stocks or future options trading, hence market risk.

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