Currency Exchange Option Types

Understanding forex options is a very important step in becoming the most successful trader you can be. An option, also called a currency exchange option, is a type of contract that gives a trader the right to buy or sell a currency during a specified period of time (Note: the trader is not obligated to buy or sell the currency if they do not feel the need to do so). In options, the cost of a contract is known as a premium. The selling price of the specified currency is called the strike price, and the date that it must be sold by is referred to as the expiration date.

Types of Forex Options

There are 2 basic types - put options and call options. A call option gives the contract holder the right to buy the currency, whereas the put option gives the contract holder the right to sell. Thus, for every put buyer, there is also a call seller. The true value is the difference between the strike price and the current price (also known as the spot price). Currency exchange options are most commonly used to minimize risk as hedging tools, as the buyer of a forex option is only risking the amount of money they paid for the contract. On the other hand, sellers are still susceptible to tremendous loss if the market moves rapidly. Many sellers provide free quotes, making it easy to find a suitable option for your needs. The following information elaborates on other methods of reducing risk in the market.

What are Forex Swaps?

Forex swaps are a type of contract between two parties that regulates an agreement to exchange a specified amount of a particular currency for another, and then after a designated period of time, return the currencies to each other. In basic terms, this strategy is a way for two parties to collaborate on a structured basis in order to earn a profit. They can be arranged in various maturities ranging from a few months to 30 years, depending on the agreed upon preferences of the participating parties. Forex swaps are sometimes combined with interest rate swaps for maximum efficiency, and these type of combined arrangements are most common in Europe. The following is an example: A party in the United States needs Japanese Yen, and a Japanese party needs U.S. Dollars. These two parties arrange a forex swap and agree upon a set interest rate, swap amount and maturity date. Ideally, at the time of maturity the currencies are swapped back and both parties earn a profit. Fortunately, the contract is negotiable for up to 10 years after the agreement, making them a flexible and ideal option for many parties.

What are Forex Futures?

Forex futures are a type of investment derivative that make it easier to minimize risk by hedging a position on a specific currency exchange. In a futures contract, the contract holder agrees to perform a currency exchange on a designated date at the price that was applicable on the latest closing date. Forex futures are commonly bought and sold in the market, similar to any other investment instrument, and are one of the most popular derivatives used in hedging. An example of a trader using a futures contract is as follows: A trader takes a long position in Swiss Francs using U.S. Dollars, but is worried about the possibility of the price of the Franc falling in relation to the U.S. Dollar, and therefore takes out a futures contract on the Dollar using Swiss Francs. This protects them because, if the price of the Franc falls, the value of their futures contract will rise, allowing them to negate the loss on the trade. If you're planning on building a successful home business in the forex market, learning how to minimize your risks is essential. Thus, gathering all available information pertaining to options, swaps, and futures is a necessary step in the education process.