Feature Currency Contract For Free

In every currency transaction, one currency is bought and another sold. For example an option to buy US dollars (USD) for Indian rupees (INR) is an USD call and an INR put. Conversely, an option to sell USD for INR is an USD put and an INR call.

Call Option and Put Option A call option provides the buyer with the right to buy a currency at the strike price. A put option provides the buyer with the right to sell a currency at the strike price.

There are primarily six factors that determine the value of an option. The factors are underlying price, exercise price, time to expiration, risk-free rate, volatility, and interim cash flows & costs.

Yet, it permits the option holder to buy or sell a currency at a fixed price. The disadvantage of a currency option is that the option itself is not free because even the out-of-the-money option has a positive value. In other words, the entire option premium would be lost if the option is not exercised at maturity.

The major drawbacks of currency options are as follows: Options must be paid for immediately as and when they were bought.There is a lack of negotiability for tailor made options. Traded options are not available in all currencies, although they can be obtained for the major currencies.

A currency put option is a hedging contract that gives the holder the right, but not the obligation, to sell a specific currency at a specific price within a defined period of time. A currency call option is the opposite of a currency put option.

A currency option (also known as a forex option) is a contract that gives the buyer the right, but not the obligation, to buy or sell a certain currency at a specified exchange rate on or before a specified date. For this right, a premium is paid to the seller.