CIMA F3 Syllabus C. Financial risks - Currency Options - Notes ^{5 / 6}

Features of Currency Options

A currency option gives its holder the right to:

Buy (Call option) the contracted currency or
Sell (Put option) the contracted currency

on or before a specified date, at a fixed rate of exchange (the strike rate for the option).

If the exchange rate moves against you - then take the option which is more favourable
If the exchange rate moves in your favour - then ignore the option (which would be adverse)... You can't lose!

Clearly, because of this, the option involves buying at a premium at the beginning

Disadvantages

1. The premium

2. Must be paid up immediately

3. Not available in every currency

Advantages

1. Currency options do not need to be exercised if it is disadvantageous for the holder to do so.

2. Holders of currency options can take advantage of favourable exchange rate movements in the cash market and allow their options to lapse. The initial fee paid for the options will still have been incurred, however.