FX Options Application

How are FX options used?

FX options are financial derivatives that give the holder the right, but not the obligation, to buy or sell a specified amount of a currency pair at a predetermined price on or before a certain date. FX options can be used to protect against potential losses from a decline in the value of a currency. 

For example, if a trader expects to receive a certain amount of Swiss francs in the future and is worried that the value of the Swiss franc will fall, they could purchase an FX option to protect against potential losses such as the GPB call - CHF put. 

If the value of the franc falls below a certain level, the trader can exercise the option and buy a certain amount of GBP, in order to protect their investment. The value of the option would be determined by the difference between the exchange rate at expiration and the predetermined strike price.

What are barrier options?

Barrier options are a type of financial derivative that involves a trader entering into a contract to either buy or sell a specified amount of an underlying asset at a predetermined price on or before a certain date. 

In the case of FX barrier options, the underlying asset is a currency pair and the predetermined price is called the "barrier" or "knock-out" level. If the price of the currency pair reaches or exceeds the barrier level at any time before the option expires, the option is automatically "knocked out" and becomes worthless.

These barrier options are known as being "path dependent" because their value depends on the path that the currency follows, rather than just its value at expiration. The more volatile the currency, the more discount an investor can expect for adding a barrier to the option, but the option will also be worth more in the first place.

Barrier options can be used in a variety of ways in FX trading. For example, a trader may enter into a barrier option contract to buy a currency pair if it reaches a certain price, in order to take advantage of a potential price increase. Alternatively, a trader may enter into a barrier option contract to sell a currency pair if it reaches a certain price, in order to protect against potential losses from a price decline.