FOREX MARKET, FOREX TRADING

A currency option is a contract that gives the holder the right, but not the obligation to buy or sell a specified currency during a specific time period. It can be used to hedge a FOREX transaction and are a favored method of reducing risk in companies that trade goods overseas.

There are two basic types of option: Call options and Put options. A call option gives the holder the right to buy a currency while a put option gives the holder the right to sell. The worth of an option at expiry is equal to the value realized by the holder in exercising the option. If the holder gains nothing, the option is worth nothing.

Intrinsic value is linked to the 'strike price' - the value specified by the option contract. A call option has intrinsic value if the spot (current) price is above the strike price. A put option has intrinsic value if the spot price is below the strike price. If the option contract has intrinsic value it is said to be 'in the money', otherwise it is 'out of the money' or 'at the money' (at par). Options would only be exercised if they are in the money.