Chapter 24

Options and Exotics


At the Interbank level, options have been an integral part of the FOREX landscape for many years. It is estimated that options may comprise up to 20 percent of FOREX market share, a substantial portion for hedging purposes by banks and corporations.

A bank may be at risk on an international loan for a short time. Hedging with currency options can eliminate that risk. Hedging acts as an insurance policy. If the bank is at risk on the long side of the EUR/USD, it can take the opposite position in options. A corporation might do the same while awaiting payment on a large sale. Loss on the business-side transaction is compensated by a profit in the hedge. For retail currency traders, speculative options trading has been the domain of seedy boiler room operations until recently. There are now three domains in which you may trade currency options: (1) exchange trade listed currency options; (2) you can spread-bet currency options at some of the spread betting operations mentioned in Chapter 8, “Selecting a FOREX Broker;” and (3) several reputable retail broker-dealers now offer FOREX options on over a dozen or more pairs and with a wide variety of features. I now recommend traders who wish to work with currency options use a retail FOREX broker. The advantages and convenience of being able to trade spot FOREX and the corresponding FOREX options under one roof is substantial.

Spot FOREX options may be used either as a substitute for spot trading ...

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