chapter 5

FX Options: Concepts

LEARNING OBJECTIVES

This chapter introduces readers to the basic concepts of foreign exchange (FX) options with detailed illustrations. Reading and analysis of the extensive illustrations provided in this chapter is essential for all those who are new to the world of options. The contents of this chapter are organized in the following order:

 

1. What Is an Option?

2. Option Definitions (From Currency Perspective)

3. Basics of Option

4. Option Payoff

5. Payoff Diagrams

INTRODUCTION

As discussed in Chapter 3, hedging is like ‘securing a rate or freezing a certain rate for foreign currency receivable/ payable’. Once a person has hedged his exposure at a particular price, any subsequent rise or fall in exchange rate ...

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