Options Market. A currency option is a contract between a buyer and a seller that gives the buyer the right, but not the obligation, to trade a specific amount of currency at a predetermined price and within a predetermined period of time, regardless of the market price of the currency; and ives the seller, or writer, the obligation to deliver the currency under the predetermined terms, if nd when the buyer wants to exercise the option. More factors affect the option price relative to he prices of other foreign currency instruments. Unlike spot or forwards, both high and low ability may generate a profit in the options market. For some, options are a cheaper vehicle for currency trading. For others, options mean added security and exact stop-loss order execution.
Currency options constitute the fastest-growing segment of the foreign exchange market. As of pril 1998, options represented 5 percent of the foreign exchange market. (See Figure .4).
The biggest options trading center is the United States , followed by the United Kingdom and Japan
Options prices are based on, or derived from, the cash instruments. Often, however, traders have is conceptions regarding both the difficulty and simplicity of using options. There are also is conceptions regarding the capabilities of options. Trading an option on currency futures will
entitle the buyer to the right, but not the obligation, to take physical possession of the currency future. Unlike the currency futures, buying currency options does not require an initiation margin. He option premium, or price, paid by the buyer to the seller, or writer, reflects the buyer's total ask. However, upon taking physical possession of the currency future by exercising the option, radar will have to deposit a margin.
The currency price is the central building block, as all the other factors are compared and analyzed against it. It is the currency price behavior that both generate the need for options end impacts on the profitability of options.
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