Forex and Exotic Options

A forex option contract is a different contract offered to a trader. The trader has right, but not the obligation, to buy the contract. The trader also has the right to sell the contract to another.

The contract may include the price of one currency against another. This may have an expiration date and purchase price called a premium.

Forex options are mostly traded over the phone rather than online. This gives the opportunity to customise the option for a trader. A trader can choose just about any expiration date or strike price.

This provides the trader with more flexibility in forex markets. The down side is it is difficult to determine if the price is fair. Traders will have to weigh their options when trading forex.

Types of Forex Options

There are two kinds of forex options which are vanilla and exotic. Vanilla options are the standard options found on the market. These are familiar to options and stock traders as puts and calls.

Exotic options are different than the American and European options. The difference is in terms of how the payoffs are calculated. These are often traded over the counter instead of over an exchange.

Exotic options are completely different types of options products. Exotic options can also be a variation of a vanilla option as well. One type of exotic option is a barrier option with trigger points.

Barrier Options

A barrier option has one or two triggers called a single or double. The single barrier has one trigger and if touched an option exists. This is called a knock-in and become vanilla options with a strike.

Barrier options also have the opposite called a knock-out position. In the knock-out positions the trade begins with a vanilla option. If the barrier price is reached then the vanilla option is cancelled.

A double barrier option is essentially the same as a single barrier. This has two trigger prices one on either side of the instrument. Double barriers have knock ins when the price hits a strike price.

Knock outs are when a trader starts with a vanilla options. If the price hits a high or low strike the trade is knocked out. In these cases a trader has no further obligation on the options.

Exotic and forex options are hard to trade since many are traded over the counter and they are also difficult to comprehend. They are not very common types of trades and currently only traded by experienced investors.

Share and Enjoy :

• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 
• 

Comments & Ratings

---