A currency option is a contract between a buyer and a seller that gives the buyer the right, but does not impose an obligation, to purchase a certain amount of currency at a predetermined price and within a predetermined period, regardless of the market price of the currency, and imposes an obligation on the seller (writer) to transfer to the buyer currency within the established period, if and when the buyer wishes to carry out an option transaction.

A currency option is a unique trading instrument equally suitable for speculation and hedging. Options allow you to adapt the individual strategy of each participant to market conditions, which is vital for a serious investor.

Options prices, in comparison with the prices of other currency trading instruments, are affected by a larger number of factors. Unlike spots or forwards, both high and low volatility can create profitability in the option market. For some, options are a cheaper currency trading tool. For others, options mean greater security and accurate execution of orders to close a loss-making position (stop-loss orders).

Currency options occupy a rapidly growing sector of the foreign exchange market. Since April 1998, options occupy 5% of the total volume on it (see Fig. 3.1.). The largest option trading center is the United States, followed by the United Kingdom and Japan.

Option prices are based and are secondary to RNV prices. Therefore, an option is a secondary instrument. Options are commonly referred to in connection with risk insurance strategies. However, traders are often confused about the complexity and ease of use of options. There is also a lack of understanding of options options.

In the forex market, options are possible in cash or in the form of futures. It follows that they are traded either “over the counter” (over-the-counter, OTC), or in a centralized futures market. Most foreign exchange options, approximately 81%, are traded in OTC (see Figure 3.3.). This market is similar to spot and swap markets. Corporations can contact banks by phone, and banks trade with each other either directly or through brokers. With this type of dealing, maximum flexibility is possible: any volume, any currency, any term of the contract, any time of day. The number of currency units can be integer or fractional, and the value of each can be estimated both in US dollars and in another currency.

Any currency, not only that which is available under futures contracts, can be traded as an option. Therefore, traders can operate the prices of any, the most exotic currency that they need, including cross-prices. The validity period can be set any - from several hours to several years, although basically the dates are set based on integer numbers - one week, one month, two months, etc. RNV works continuously, so options can be traded literally around the clock.

Trading options on currency futures gives the buyer the right, but does not impose an obligation to own a physically foreign currency futures. Unlike currency futures contracts, you do not need to have an initial cash reserve (margin) to purchase foreign exchange options. The value of the option (premium), or the price at which the buyer pays the seller (writer’s), reflects the overall risk of the buyer.

The following seven key factors influence option prices:

1. The price of the currency.
2. The selling price (strike (exercise) price).
3. Currency volatility.
4. Validity.
5. The difference in discount rates.
6. Type of contract (call or put).
7. Option model - American or European.

The price of the currency is the main pricing component and all other factors are compared and analyzed taking into account this price. It is the changes in the price of the currency that determine the need for using the option and affect its profitability. The effect of the currency price on an optional premium is measured by the Delta index, by the name of the first Greek letter used to describe pricing aspects when discussing factors affecting the value of an option.

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Delta

Delta, or simply A, is the first derivative of the option pricing model (ITS). This index can be considered in three aspects:

1. As a change in the price of a currency option (CVO) relative to a change in the price of a currency. For example, a change in the price of an option with A \u003d 0.5 is expected to be half the change in the price of the currency. Therefore, if the price of a currency rises by 10%, the price of the option on this currency will increase presumably by 5%.

2. As the degree of risk insurance (hedge ratio) option relative to the currency futures, necessary to establish a balanced risk (neutral hedge). For example, with A \u003d 0.5, two option contracts for each of the futures contracts are needed.

3. As a theoretical or equivalent equity position. With this approach, Delta is a part of the currency futures, in which the buy’s buyer is in the “long” position or the put’s buyer is in the “short” position. If you use the same indicator A \u003d 0.5, this will mean that the buyer of the put option sells 1/2 of the currency futures contract.

Traders may not be able to guarantee the prices of spot markets, irreversible forwards or futures, temporarily leaving the Delta position un insured. To avoid the high cost of insurance and the risk of an unusually high volatility, the trader can insure the position of the original option with other options. Such risk mitigation methods are called Gamma or Vega insurance.

Gamma

“Gamma” (G) is also known as “curvature of the option”. This is the second derivative of the option pricing model (ITS) and represents the degree of change in the Delta option, or the sensitivity of the Delta. For example, an option with A \u003d 0.5 and G \u003d 0.05 should presumably have A \u003d 0.55 if the price of the currency rises by 1 point, or A \u003d 0.45 if the price drops by 1 point. "Gamma" varies from 0 to 100%. The higher the Gamma, the higher the sensitivity of the Delta. Therefore, it may be appropriate to interpret Gamma as an indicator of the option’s acceleration in relation to the movement of the currency.

Vega

"Vega" characterizes the effect of volatility on the value of premium per option. "Vega" (Ξ) characterizes the sensitivity of the theoretical price of the option relative to changes in volatility. For example, Ξ \u003d 0.2 creates a premium increase of 2% for every percent increase in calculated volatility and a premium decrease of 2% for every percent decrease in calculated volatility.

An option is sold for a certain period of time, after which a date known as expiration date sets in. The buyer who wishes to exercise the option must notify the writer on the day or the day before the expiration date. Otherwise, he releases the writer from any legal obligations. An option cannot be exercised upon expiration.

Theta

Theta (T), an index also known as fading in time, is used when the theoretical value of an option is completely lost due to very slow currency movement or lack thereof.

For example, T \u003d 0.2 means a loss of 0.02 premium for each day when the price of the currency does not change. The domestic price does not depend on time, but the external one does. The fading in time increases as the expiration approaches, since the number of possible outputs continuously decreases over time. The influence of the time factor is maximum on the at-the-money option and minimal on the in-the-money option. The extent to which this factor affects the out-of-the-money option is somewhere within this range.

The bid-offer spreads on the foreign exchange market can make selling options and trading irreversible forwards very expensive. If the option goes deep into the money, the difference in discount rates achieved in quick exercise can exceed the value of the option. If the option volume is small or the expiration date is close and the option value consists only of its intrinsic value, early exercise may be preferable.

Due to the complexity of the determining factors, calculating the price of options is difficult. At the same time, in the absence of a pricing model, options trading is nothing more than an ineffective gambling. One of the ideas for determining the option price is to consider buying your own currency for foreign currency at a certain price X the equivalent of an option to sell foreign currency for your own at the same price X. Thus, a call option in its own currency turns into a put option foreign and vice versa.

A currency option is an agreement between two brokers (dealers). Under this agreement, one broker (dealer) writes out and transfers the option, and the other purchases it and obtains the right, within the stipulated terms of the option term, or to buy at a specified rate (strike price) a certain amount of currency from the person who has written the option (purchase option), or sell this currency to him (option to sell).

Thus, the seller of the option is obliged to sell (or buy) the currency, and the buyer of the option is not obliged to do this, i.e. he can buy or not buy (sell or not sell) currency.

An option is a special form of insurance of currency risks that protects the buyer from the risk of adverse changes in the exchange rate above the agreed strike price, and gives him the opportunity to receive income if the exchange rate changes in a favorable direction for him above the strike price.

The growth of the exchange (i.e. current) exchange rate compared to the strike price is called the upside (from the English upside - the upper side). The decrease in the exchange rate compared to the strike price is called the downside (from the English downside - the bottom side).

There are three types of options:

option to buy, or option com (from the English call). This option means the right of the buyer of the option (but not the obligation) to buy a currency to protect against (or based on) a potential increase in its rate;

option to sell, or put option (from shhl.rSh). This type of option means the buyer's right of the option (but not the obligation) to sell the currency to protect against (based on) their potential impairment;

a double option (from the English put-call option), or a shelving option (German stallage). This type of option means the right of the buyer of the option to either buy or sell currency (but not buy and sell at the same time) at the base price.

The term is indicated on the option - this is the date (or time period) after which (which) the option cannot be used.

There are two styles of options: European and American.

European style means that the option can only be used on a fixed date.

American style means that the option can be used at any time within the term of the option.

The option has its own course - this is the strike price (from the English strike price). Option rate - the price at which you can buy or sell currency, i.e. option asset.

The buyer of the option pays the seller of the option or the person who has paid the option a fee called a premium.

Bonus - option price. The risk of the option buyer is limited to this premium, and the risk of the option seller is reduced by the amount of the premium received.

Possession of an option enables its holder to react flexibly in case of uncertainty of future obligations. An option transaction is not obligatory for the owner of the option, therefore, if the option is not exercised, the owner can either resell it or leave it unused. Currency options are traded in foreign exchange markets around the world, including markets in the USA, London, Amsterdam, Hong Kong, Singapore, Sydney, Vancouver and Montreal. In all of these markets, three types of currency options are traded.

over-the-counter options of the European type. Such options are issued by banks for their customers - exporters and importers in accordance with their needs in terms of the size of the contract and the date of its execution. An option issuer usually hedges a forward contract with another bank or an option contract with an exchange to hedge its risk;

exchange-traded currency options, which first began to be traded in the early 80s on the Philadelphia Exchange;

options for currency futures traded, for example, on the Chicago Board of Trade.

Table 24.7 shows the data forms for quotes of currency options published in print.

Table 24.7

Philadelphia Exchange Options Option & Underlying CA1IS - LAST PUTS - LAST STRIKE PRICE 31,250 GBP per unit Mar Apr Jun Mar Apr Jun B Pound 158 RRRR 1.44 / g 160.44 159 RRR 1.07 RR 160.44 160 2.00 R 3.55 1.53 RR 160.44 162 0.87 R 2.50 RRR 160.44 163 0.75 RSRRS 160.44 164 0.50 RRRRR

The symbol R means that trading on this option on this day was not conducted, the symbol S - this option does not exist.

From the above data it can be seen that at the current rate of the pound sterling equal to 160.44 prices per 1 f. Art., it was possible to buy options for the purchase or sale of 31,250 p. Art. with a strike price of 158 to 164 cents for 1 f. Art. Moreover, on this day, not all existing options were traded, but June options with a strike price of 163 cents per 1 f. Art. was not on the exchange.

Example. An option to purchase US dollars with the following parameters is offered on the currency exchange: transaction volume - 10 thousand dollars. USA; term - 3 months;

optional rate (strike price) - 27 rubles / dollar. USA; premium - 0.5 rubles / dollar. USA style is European.

The acquisition of such an option allows its owner to buy 10 thousand dollars. USA after 3 months at the rate of 27 rubles. for 1 dol., i.e. the cost of buying foreign currency will be 270 000 rubles. (10 000 dollars. X 27 rubles.).

When concluding an option contract, the buyer of the option pays the seller of the option a premium of 5,000 rubles. (10,000 dollars x 0.5 rubles). The total cost of buying an option and currency for it is 275,000 rubles. (270 000 rub. + 5000 rub.).

When buying an option, the buyer provides himself with complete protection against an increase in the exchange rate. In our example, the buyer has a guaranteed currency purchase rate of 27 rubles. for $ 1 USA. If put on the exercise of the option, the spot rate will be higher than the option rate, then the buyer will still buy the currency at the rate of 27 rubles / dale. The United States will benefit from an appreciation of the currency in the market. If on the exercise day the spot rate is lower than the option rate, the buyer can refuse the option and buy dollars in the cash market at a lower rate than the option rate. Thus, he benefits from a decrease in the exchange rate1.

For an option to purchase a currency when it is implemented, an effective exchange rate

Therefore, the condition under which the exercise of the option to purchase a currency is more profitable (allows you to buy a currency cheaper), has the form:

which is equivalent to condition Jaa 1 Strategies for trading futures and options are described in more detail in: WeisweilerR. Arbitration. Opportunities and technique of operations in financial and commodity markets / Per. from English M .: Zerich-PEL, 1993.S. 139-144; Stock portfolio (Book of the issuer, investor, shareholder. Book of stock exchange. Book of financial broker) / Resp. ed. Yu.B. Rubin, V.I. Soldatkin. M: Somintek, 1992.S. 69-721; Edler A. How to play and win on the exchange / Per. from English M .: KRON-PRESS, 1996.

Theme 14. Currency option and option currency strategies

Deals  with option(lat. optio - choice, desire, discretion) - an agreement under which a potential buyer or potential seller receives the right, but not the obligation, to make the purchase or sale of an asset (product, security) at a predetermined price at a time specified in the agreement in the future or for a certain period of time. An option is one of the derivative financial instruments.

Option premium- this is the amount of money paid by the buyer of the option to the seller at the conclusion of the option contract. In economic terms, the premium is a fee for the right to conclude a deal in the future.

Options transactions are fundamentally different from forward and futures transactions. Two parties take part in the completion of an option transaction: the seller of the option (option label) and its buyer (option holder). The holder of the option (buyer) has right,not an obligation to make a deal.

Unlike a forward, an option contract is not binding; its holder may choose one of three options :

fulfill an option contract;

leave the contract without performance;

sell it to another person before the expiration of the option. The option writer takes the obligation to buy or

Option purchase price (premium ) it is defined as a percentage of the amount of the option agreement or as an absolute amount per unit of currency and is paid by the buyer at the time of the sale of the option long before the completion of the option agreement, regardless of whether it is implemented at all or not.

The value of the option (premium) is a contractual value and depends on the volume of purchase and sale of currencies, the type of currency, the current exchange rate and the strike price of the option. The latter, in turn, usually depends on the current exchange rate and the prospects for its change, information about which can serve as data on forward exchange rates published in financial publications.

In any case, the settlement of the settlement price is carried out in such a way that both the buyer and the seller after the completion of the option have a certain benefit.

The mechanism for the implementation of options with securities. The procedure for concluding and implementing option contracts on foreign exchange and stock exchanges.

Rules and mechanism for calculating and fixing in the contract an urgent optional exchange rate. Basic calculation methods. Modern optional strategies and their modifications. Brief description of various diversified option strategies, their goals and methods of practical implementation.

Distinguish between options:

for sale (put option) - Gives the option buyer the right to buy the underlying asset at a fixed price;

to purchase ( call option ) - Gives the option buyer the right to sell the underlying asset at a fixed price;

bilateral ( double option ).

The most common options are two styles - American and European.

American optioncan be redeemed on any day of the term before the expiration of the option. That is, for such an option, a period is set during which the buyer can exercise this option.

European optioncan be repaid only on one specified date (expiration date, due date, repayment date).

Accordingly possible four types of options transactions:

buy call option;

write out (sell) Call option;

buy put option;

write out (sell) Put option.

Option term(expiration date) - this is the point in time at the end of which the buyer of the option loses the right to buy (sell) currency, and the seller of the option is released from his contractual obligations.

The base value of an option- this is the price for which the buyer of the option has the right to buy (sell) currency in case of implementation of the contract. The base value is determined at the time of the transaction and remains constant until the expiration date.

The price of an option depends on a number of factors:

basic price (strike prices);

current exchange rate (spot);

market volatility (volatility);

term of the option;

average bank interest rate;

correlation of supply and demand.

Option price includes:

intrinsic (actual) value;

external (temporary) value. Intrinsic valuean option is determined by the difference between its

Work in the financial market requires an extensive knowledge base from the participant. In this article, we will answer the question of what currency options are and how they are used in a modern market. Let's start with the most important thing - with the definition.

So, currency options  -this contracts are concluded between buyers and sellers. Thus, the buyer receives the right (an important point - it is imposed on the buyer, unlike the seller) to buy a given amount of currency at a predetermined value, regardless of the current market value of the currency.

In this case, the seller, within the framework of the currency option, is obliged to transfer the currency to the buyer within the prescribed period (at the initiative of the buyer who wishes to complete the transaction).

Currency as a tool in the hands of financiers

Currency options are truly unique trading tools that are suitable not only for trading on the market, but also can be used to insure your own risks. Options provide an opportunity to adapt an individual strategy to any market conditions. Currency options at this stage are vital for truly serious investors.

Note that the current value of an option is affected by a significantly larger number of factors than other currency trading instruments. So, unlike the same forwards or spots, low or high can create profitability of operations in option markets. At this stage:

1. Options is one of the most affordable currency trading tools.
2. Options - a guarantee of the execution of applications on time and the security of the transaction.

At this stage, currency options are very common in the forex market. The largest option trading center is the USA, the second and third places are respectively occupied by England and Japan.

A currency option is a secondary tool, because the option price is secondary to the current value of the RVN. And as practice shows, many traders do not evaluate all the options and do not fully use them.

Work with currency options

At this stage, options in the foreign exchange market are possible in the form of futures or for cash. Thus, you can trade options either OTC (over-the-counter, which means “through the counter”) or in centralized futures markets.

In the modern market, more than 80% of all operations are performed precisely on the OTC. It should be noted that OTC is almost completely identical to the markets. Employees contact directly with banks, banks themselves trade directly with each other, or work through a series of brokers.

Work on the OTC market implies maximum flexibility - any terms of the contract, any and any amount. Currency units can be fractional and integral, the unit value is estimated not only in US dollars, but also in any other currency.

Options trading

At the present stage, any currency can be sold as an option - thus, traders operate on the value of even the most exotic currencies, if necessary. There are no restrictions on the validity period - from several hours to years. However, traders prefer integers in their work - two weeks, three months, one year. And since RNV works round the clock, the time for trading options is unlimited.

At the beginning of our article, we already said that the trading of options gives the buyer the right, but does not impose any obligations on the possession of currency futures. The advantageous difference from the currency futures contract will be that you do not need a financial reserve (the so-called margin) to buy a currency option.

The experts identified seven main factors that directly affect the total value of the option. Factors:

• Currency value
• Her volatility
• Cost of sales
• Validity period
• Discount rates
• A kind of contract (put or call)
• Option model (there are European and American)

Of course, the main price-forming component is the price of the currency. All other factors are analyzed and compared taking into account its cost. Any changes in the current value of the currency necessitate the use of an option, and will also have a direct impact on profitability. The effect of currency value on an optional premium is measured using the Delta index.

Delta Index (A)

Delta is the very first derivative of the IUO (option pricing model). The delta is designated as A. This index can be considered in such aspects:

1. Change in CVO (price of a currency option) in relation to the change in the value of the currency as a whole.

We give an example. The Delta Index is 0.5 in relation to changes in the value of the currency. Thus, if the market moves and the value of the currency rises by 10 percent, then the value of the option on this currency will be increased by 5%.

1. Delta as a degree of risk insurance

The first derivative can be used as the degree of risk insurance option in relation to the currency futures. It can be used to establish a balanced risk. Back to the example - Delta is 0.5. In this case, it is necessary to use two option contracts for each of the futures contracts at once.

1. Equivalent equity or theoretical position

In this context, “Delta” is a part of the currency futures, in which the buyer is in the “buy” position (long), and the put buyer is in the short position (sale). If a similar example is used (delta (A) is 0.5), then the buyer of the put option sells half (1/2) of the futures currency contract.

Of course, the trader is not always able to guarantee the value of the spot market, futures or irreversible forwards - therefore, the Delta position may remain temporarily uninsured. In order to avoid the high price of insurance, as well as the risk of high volatility, a trade can act in this way - insure the position of the original option with other options.

Methods of risk neutralization are called Vega and Gamma insurance.

Gamma Index

It is briefly referred to as "G" and is better known to traders as curvature of the option (option curvature). Gamma is the second derivative of the IUO (option pricing model). This is the degree to which the Delta of the option or its sensitivity changes. For example, if an option in which Delta (A) is 0.5 and Gamma (G) is 0.05, should have Delta (A) equal to 0.55 (with an increase in the value of the currency by one point). Accordingly, with a decrease in value, the Delta will be equal to 0.45 (price drop by 1 point).

Most importantly, the higher the Gamma Index, the higher the sensitivity. This index is measured from 0 to 100%.

Vega Index

The Vega index is a characteristic of the effect of volatility on the value of an option. The index also characterizes the sensitivity of the theoretical value of a currency option to changes in its volatility.

As mentioned above, a currency option is sold only in a certain time period - after its expiration comes the "expiration date" - expiration. If the buyer wants to exercise the option, he must inform the seller about it on the day of expiration or on the eve of the expiration of the term. If the “expiration date” was omitted, the seller is automatically released from his legal obligation and it becomes impossible to exercise the currency option after the expiration date.

Theta Index (T)

This index stands for “option fading over time”. Theta is used when, due to the slow movement of the currency price (or lack of movement), the value of the currency option disappears.

We give a simple example. If the T index is 0.2, this means a loss of 0.02 of the value of a currency option daily (on days when the value of the currency remains unchanged). At the same time, it does not depend on time, but the external one directly depends.

As the expiration of a currency option approaches, the Theta index (fading over time) increases. This is explained quite simply - the number of possible conclusions regularly decreases over time.

In the foreign exchange market there are so-called bid-offer spreads that make trading and selling options or trading irreversible forwards extremely expensive. So, if a currency option turned out to be very deep into the money, then the difference in discount rates that was achieved with its quick execution can directly exceed the value of the currency option.

And if the volume of a currency option is very small, or the expiration dates are close (and the option value consists only of the intrinsic value), earlier its execution is preferred and most beneficial for the trader.

Conclusion

The determining factors of currency options are extremely complex - as a result, for many traders the procedure for calculating the value of a currency option is very difficult. However, in the absence of a pricing model as such, options trading is akin to a game of chance with a very low degree of efficiency and a high probability of losing.

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Currency option (Currency Option) - a form of an urgent transaction of two parties - the seller and the owner, as a result of which the option holder receives the right, and not the obligation, to buy from the seller the option or sell him a predetermined amount of one currency in exchange for another at the specified or at the exchange rate determined on the day of exchange. This fixed rate is called the strike price.

The owner of the option has the right to choose to exercise the option or refuse it, depending on how favorable the exchange rate fluctuations will be for him.

The seller of the foreign currency option is obliged to perform the foreign exchange operation at the exchange rate (strike price) established by the option transaction and to ensure that the holder of the foreign currency option meets the terms of the agreement before the deadline is reached. If the transaction is completed, use the terms “option completed” or “option executed”.

Depending on the place of sale, currency options are divided into exchange-traded, freely traded, and over-the-counter. Stock options  (traded option) sell and buy option exchanges, which are a kind of financial institutions that have become an integral part of the financial market of economically developed countries. The most famous of them are the London Stock Exchange, the European Option Exchange in Amsterdam, the Philadelphia, Chicago, Montreal.

Exchange options may be in circulation on the secondary market, freely bought and sold by third parties until the end of their term of use. They are standardized for certain types of currencies, amounts and due dates. The standard specification of a currency option contains the following details:

• currency name;
• name of the transaction (purchase or sale);
• amount of currency;
• exchange rate;
• expiration date of the option period;
• conditions for the exercise of a currency option (specific date or option period).

OTC Options  (Over-the-Counter Option, OTC option - through the counter) can be considered as a purely banking tool. They are sold and bought by the buyer and the bank, as a rule, by individual agreement on a contractual basis and according to the specification that meets the requirements of the buyer. Mostly in the over-the-counter currency options market, banks work with large corporations.

Considering advantages of currency options  before other species, it should be noted that their use is beneficial (appropriate) in the following cases:

1. if the time and amount of foreign exchange earnings are not clearly defined;
2. in order to protect export and import flows of goods sensitive to price changes;
3. in case of publication of price lists for their goods in foreign currency;
4. in order to support an offer to conclude a contract valued in a foreign currency;
5. if necessary, ensure simultaneous insurance of commercial and currency risks.

In world practice, depending on the nature of the currency exchange operation, the currency option “call” (call) and the option “put” (put) are distinguished. The currency call option entitles its holder to buy a certain amount of one currency in exchange for another. The “put” currency option gives the owner the right to sell a certain amount of one currency in exchange for another. For example, if an enterprise, having bought the currency put option in hryvnias, gets the right to sell the corresponding amount in US dollars in exchange for the hryvnia, then it will be the dollar currency put option.

Currency Call Option  mainly used:

• for the purpose of a short currency position;
• in case the exchange rate has a steady upward trend;
• for resale for profit.

To use put currency option  mainly resorted to:

• hedging long;
• if the exchange rate has a steady downward trend;
• for the purpose of hedging the expected income and sale of foreign currency.

If the option is exercised, the seller of the currency option “ call"Must sell the currency to the holder of the option, and the seller of the currency option" put»Must buy the currency from the owner of the option. This is a prerequisite for the implementation of a currency option (implementation of an option agreement).

From a legal point of view, participants in an option transaction are always equal. However, from the point of view of the economy, the buyer of the option is in a better position, since it is he who makes the final decision on buying or selling the currency when the option expires (date), paying the option premium for this. The option seller has the right only to agree with the buyer's decision and fulfill his obligations in one of the forms:

1. in the case of the sale of a “call” currency option, the option seller must sell the agreed amount of currency to the buyer (owner) of the option;
2. in the case of the sale of a “put” currency option, the seller of the option is obliged to buy the agreed amount of currency from the buyer (owner of the option);
3. accept the offer of the option holder to refuse to exercise it.

The purchase price of a currency option (premium) is defined as a percentage of the amount of the option agreement or as an absolute amount per unit of currency and is paid by the buyer when the option is sold in advance of the completion of the option transaction, regardless of whether it will be implemented at all or not.

The value of a currency option (premium) is a contractual value and depends on the purchase and sale of currencies, the type of currency, the current exchange rate and the strike price of the currency option. The latter, in turn, usually depends on the current exchange rate and the prospects for its change, which can be evidenced by data on forward exchange rates published in financial publications, in particular in the Financial Times.

Depending on the timing of the completion of the option, “American” and “European” options are distinguished (sometimes the terms “American style” and “European style” are used). "European" option  (European-type option) can be executed only on the last day of the option period (on a certain date), and "American" option  (American-type option) - at any time during the entire option period. In world practice in different countries both “American” and “European” options are widely used. The practical application of option deals in Ukraine and Russia is still based on the use of the “European” style.

The advantage of using a currency option is that the option holder can avoid significant losses from sudden changes in exchange rates by fixing in advance an acceptable level of exchange rates. If there are no such sharp fluctuations in exchange rates, and exchange rates remain stable, the holder of the option may refuse to exercise it, and his maximum expense in this case will be only an amount equal to the premium. This will be the payment for currency risk insurance.

If the option is completed, profit (loss) is defined as the difference between the strike price and the current rate of the currency sold or bought minus a premium.

The general rule for determining the feasibility of implementing an option agreement is to compare the current exchange rate on the exercise date of the option with the strike price. If the spot rate is lower than the strike price on the exercise day of the currency option, it is advantageous to exercise the put option, and if the current rate exceeds the strike price, the call option. So, we can assume that the profit and risk of the option seller are directly opposite to the profit and risk of the owner. The seller of a currency option can receive the maximum profit equal to the amount of the bonus if the option is not exercised. If the option agreement is completed, the seller may even incur losses, because he will have to buy (sell) the currency at a rate different from the current one to the disadvantageous side. However, in practice, due to the fairly reliable forecasting of exchange rates, this phenomenon is quite rare, and the premium takes into account the possibility of mutual distribution of risks between the buyer and the seller of the option.

To calculate income and possible losses, it is important to determine the strike price of a currency option. For exchange-traded currency options, it is determined by the option exchange on the day the option expires. Depending on the length of the option period, several performance price indicators are set. Information on such prices and the amount of option premiums are regularly published in the REUTERS, DOW JONES TELERETE, BLOOMBERG systems.

Depending on the possibility of making a profit or loss, they distinguish:

1. currency option with a win: a call option with a strike price lower than the market (current) exchange rate; put option with strike price higher than current exchange rate;
2. non-winning currency option: call and put option, the exercise price of which is equal to the current exchange rate;
3. foreign exchange option with a loss: call option with a strike price higher than the current exchange rate; put option with strike price lower than current exchange rate.

For options of the "European" style, there are practically no additional options, since the price and exercise date are fixed in advance. As for the “American” options, the buyer and seller receive additional opportunities for profit by observing the dynamics of the exchange rate, since the option can be exercised at any time during the period of the option.

The main factor determining the size of the option premium is the dynamics of the strike price of the option relative to the current spot rate at the time the option is sold to the owner. The premium will be the higher, the more favorable the strike price relative to the spot rate. In any case, if the probability of exercising a currency option is high, the option premium also rises. At the same time, if the option holder has paid a significant amount of the premium, it will almost always be more profitable for him to exercise (complete) the option in order to minimize losses.

The main elements of an exchange option contract are:

• type of option (“put” or “call”);
• style ("American" or "European");
• type of currency;
• exercise date or duration of the option period.

Real economic practice shows that over time, foreign exchange operations are modified, their new forms and varieties appear, which requires a high level of organization of their activities from currency market operators. Large banks for the organization and conduct of foreign exchange operations create special units of foreign exchange dealing with the management of foreign exchange assets through foreign exchange transactions. The main objective of the activities of such units is to regulate the structure of the currency part of the balance sheet and generate additional income.