Currency Options Trading Can be Vanilla or Exotic
Currency options trading create options with the foreign exchange providing the underlying assets. The option contract can be traded on a forward basis. This means the settlement date of the options contract is in the future which is usually 30, 60, 90, 6-months or any period up to a year. The currency options are the right but not the obligation to buy or sell currency at a specific strike price before or on an expiration date.
Vanilla Options
Currency options trading leading to a standard option is called a vanilla currency option. If it were a call option, the option would be exercised if the spot exchange rate on the call currency in the Forex market is higher than the strike price stated in the contract. If it is a put option, the contract would be exercised if the Forex market exchange rate for the underlying put asset or put currency remains below the strike price.
Going Exotic
Exotic options are a different type of option in currency options trading. The exotic options are more complex and have varying conditions. For example, the knock-out option has a barrier exchange rate that is called an out-strike. When the out-strike is exceeded, the option automatically expires.
Other exotic options used in currency options trading include the double-barrier option, the binary option, the one-touch-SPOT, the basket option, compound options and many others.
Many traders enjoy the challenge of currency options trading and one reason is because of the flexibility available in trading strategies.
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Filed under General by on Sep 1st, 2011. 
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