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Chapter 12

Currency Options

8.1 Definition

 A currency option is a right, but not an obligation, to buy or sell a currency at
an exercise price on a future date.

8.2 Features and operation

 If there is a favourable movement in rates the company will allow the option to
lapse, to take advantage of the favourable movement. The right will only be
exercised to protect against an adverse movement.

 The writer of the option will charge a non-refundable premium for writing the
option.

 There are two types of option:

– a call option gives the holder the right to buy the underlying currency

– a put option gives the holder the right to sell the underlying currency.

8.3 Advantages and disadvantages

ADVANT DISADVANTAGES

 Offer the perfect hedge  Sterling currency options only
available in foreign markets
 Many choices of strike prices,
dates, premiums  High up front premium costs

 Can be allowed to lapse if not
required

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