Printer Friendly| Definitions | Current Spot Rates | Derivatives |
A Currency Option
concerns the purchase, or sale, of a right
to buy, or sell, a currency at an agreed rate of exchange. However, there is no obligation to exercise this right.
The advantage of this
as an FX risk hedging technique is that the possessor of the Currency Option is
not excluded from taking advantage of any movements of the rate of exchange in
his favour. This is a more flexible hedge than a Fixed Forward FX Contract
where he is locked into a fixed rate once he has taken out the Forward FX
Contract or Option Forward FX Contract.
A Currency Option is the right to buy or sell a traded currency at some agreed future time (or during some agreed future period) at an agreed price (the Exercise or Strike Price). The purchaser of a Currency Option obtains a right but not an obligation to deal at the Strike/ Exercise Price by paying a premium.
The main justification for using
Currency Options is that they protect the company from FX exposure during a
predetermined period. They reduce the uncertainty during periods when it would
be imprudent to lock into a fixed FX rate, for example, during the export
tendering, buyer's bid evaluations, or potential acquisitions or divestments.
If you are importing or exporting, for expert commercial foreign exchange services, speak to us at Raphael's Bank.
Quick and easy foreign exchange deals via our branch network, treasury centres or over the Internet.
More information.