Forex Trading: Any other Options in Forex
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Posted On :
Feb-04-2010
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Article Word Count :
626
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A currency option confers on its buyer the right either to buy or sell a specified amount of a currency at a set price known as the strike price
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A currency option confers on its buyer the right either to buy or sell a specified amount of a currency at a set price known as the strike price.
There are two types of options: call option and put option. An option that gives the right to buy is known as call option while one that gives the right to sell is known as a put option.
Depending upon the terms and conditions of the contracts, an option may be exercisable only on the final or expiration date of the period covered by the option contract.
In return for guaranteeing the exercise of an option at its strike price, the option seller or writer charges a premium, which the buyer usually pays upfront. Under favorable circumstances, the buyer may choose to exercise it.
Alternatively, the buyer receives no compensation fro the premium paid. The situation of an option buyer us thus analogous to that of a buyer of insurance, while the situation of an option writer is an analogous to that of a seller of insurance.
Every option has three different price elements:
1. The exercise or strike price, i.e. the exchange rate of the currency pair at the Forex trading platform at which the currency can be purchased (call) or sold (put),
2. The premium i.e. the cost price or value of the option itself,
3. Underlying or actual spot exchange rate in the Forex market.
There are two categories of currencies in which transaction of options are carried out at the Forex trading platform: American style options and European Style options.
When Forex options trading can be traded out at any time in the lifetime of the contract, it is refer to as American Style Option trading while the option contract, which can be carried out only in its expiration date, is referred to as European Style of option trading.
American style option provides buyer more flexibility than the European style option so it is widely accepted by the Forex trading platform.
The plus points that adds to the popularity of the option in forex trading includes its flexible terms and conditions. They are far better alternatives for trading currency pairs than the futures and forward contracts.
1. The Forex trading option buyer, at the outset, enable them to judge the worst currency pair exchange scenario, once the premium is paid, no cash is payable and when the main objective is to limit downside risk, this is a powerful advantage.
2. Since there is no obligation to exercise an option, options can be ideal for hedging the contingent currency pair, which mayor may not materialize, such as tenders.
3. Options provide a flexible hedge offering a range of prices where the option can be exercised, whereas forward or future Forex trading instruments only deal at the forward prices which exist at the time when the deal is materializing.
4. Options provide major possibilities in the range of tools available to treasures and traders. They can be used on their own to hedge or they can be combined with the forward and future trades to achieve hedges that are more complex.
5 Future forex trading requires daily margins to cover credit risk while forwards require a bank credit line whereas Forex option buyer can dispense with either depending on the specific market in which the trader operates.
By and far the Forex option trading is more feasible than any other trading tool that is why most of the traders prefer utilizing option trading for transacting currency pair exchange deals at the Forex trading platform and earn suitable returns.
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Article Source :
http://www.articleseen.com/Article_Forex Trading: Any other Options in Forex_10214.aspx
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Author Resource :
By and far the Forex option trading is more feasible than any other trading tool that is why most of the traders prefer utilizing option trading for transacting currency pair exchange deals at the Forex trading platform and earn suitable returns.
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Keywords :
Forex, Forex info, currnency pair, Forex trading platform,
Category :
Finance
:
Investing
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