Foreign Exchange Options are the highlighting quality of the Forex market and is often lovingly referred to as the Forex option. Foreign exchange options are easy to understand than many other characteristics of the currency exchange market. The first step towards establishing a foreign exchange option is for a party is paid a certain sum of money to, and thus gains a right to buy or sell a specific sum of currency.
What is the distinguished factor of the exchange option?
The distinguishing factor of the foreign exchange option is that the paid right to pursue currency transactions is not viewed as an obligation. In other words, the party paid to deal with the currency at hand is not obliged to buy or sell currency at any given time. The ability to determine exactly when to deal and how much currency to deal provides a sense of flexibility in the Forex market.
The foreign exchange option essentially allows parties to set the bar on how much risk they are willing to endure. There is a predetermined date of currency exchange and rate of the exchange, but there is no limit as to whether to pursue the particular currency that was originally of interest to the party. The traditional foreign exchange option allows the buyer to pay a premium which has been quoted for buying on a specific date for a specified price. The premiums in such foreign exchange transactions is much lower than other alternatives.
Difference between the American and European categories
The traditional foreign exchange option can be divided into the American category and the European category. The American traditional foreign exchange option provides the flexibility to the buyer to act at any time before the contract expires. On the other hand, the European traditional foreign exchange option is a bit more restricted and only allows the transaction to take place at the time of expiration.
What is “SPOT”?
Another type of option is the “single payment options trading” sometimes referred to as “SPOT”. This type of trading simplifies the options process and gives cash to the party involved if the exchange transaction succeeds. Otherwise, the SPOT may be disadvantageous because if there is a loss in the currency exchange transaction, then the party will be responsible for paying the premium amount as a loss. It is important to remember that premium rates are not set in stone when dealing with foreign exchange options such as SPOT.