In this article, I will be talking all about FX and what it is. I will also be talking about pricing and valuation. A currency option is also known as an FX option; it is a derivative contract which grants the buyer the right but not exactly the obligation to exchange the money which is denominated in one currency and into another currency on an agreed-upon exchange rate on a date which is in the future. The forex option market is also the deepest, most liquid market in the entire world. I said it is the most liquid market in the world, because it transacts up to $6 trillion every single day. Most forex derivatives trading are all over the counter and are very lightly regulated.
Forex is also referred to as FX. It is the shorthand which is used. Forex can also be referred to as the foreign exchange market or foreign exchange. There are put options and call options in place. A currency option can also be an American style or European style. Call options have the fantastic ability to provide the holder with the right, but not exactly the obligation to purchase the underlying currency at a specified forex rate on a date which is in the future.
Put options have been popular for giving the holder the right to sell the underlying currency at a forex rate on any future date given. The European option can actually be exercised only when the expiration date of the option is approaching. The American option can be appropriately exercised at any time.
Foreign exchange market traders know exactly what I’m talking about. I know the technical terms can throw you off, but you need to know the technical terms and the vocabulary of the foreign exchange market, if you want to make it in the market as a trader.
Currency options happened to be one of the most common ways for most corporations, financial institutions and traders to hedge against any adverse movements when it comes to the exchange rates.
As you know, the exchange rates keep changing all the time. For example, the USD was worth 74 Indian rupees yesterday. It is worth a little less today. It can be worth much more tomorrow. It keeps changing, as you know.
The most general rule that you need to keep in mind is you should hedge certain foreign currencies with forwards and some uncertain foreign cash flows with options. The corporations primarily make use of forex options to hedge the unsteady future cash flows in any foreign currency.
Keep in mind, one of the most common uses of forex options is for the short-term hedges of the spot forex or foreign market positions.