What is an option?

Literally, “period” means the future, and “right” means right. Option refers to the right to buy or sell a certain amount of a certain commodity at a certain price at a certain time in the future. An option is actually a right, a right of choice. The holder of the option can choose to buy or not to buy, sell or not to sell within the time specified by the option, and he can implement the right or give up This right, and the seller of the option has only the obligations stipulated in the option contract.

Option is a kind of derivative securities. They are a derivative product because the price of an option is essentially related to the price of other things. Specifically, an option is a contract that grants rights, not an obligation to buy or sell the underlying asset at a fixed price on or before a specific date. The right to buy is called a call option, and the right to sell is a put option. Those familiar with derivatives may not see the difference between this definition and future or forward contracts. The answer is that futures or forward contracts give the right and obligation to buy or sell at some point in the future.

What is a foreign exchange option?

Foreign exchange options are a type of option. Compared with other types of options such as interest rate options and futures options, foreign exchange options are traded in foreign exchange, that is, the option buyer obtains a right after paying the corresponding option premium to the option seller, that is, the option buyer After paying a certain amount of option premiums, the right to purchase and sell the currency agreed by the seller at the agreed exchange rate and amount in advance on the agreed expiry date, and the buyer of the right also has the right not to execute the above-mentioned sales contract.

Foreign exchange option trading is a trading method that has emerged in recent years. It is a development and supplement to the original several foreign exchange hedging methods. It not only provides customers with a method to retain foreign exchange, but also provides customers with the opportunity to profit from exchange rate changes, thus having greater flexibility. Foreign exchange options trading is actually a kind of rights trading. The right holder has the right to purchase or sell the agreed amount of foreign currency from the right holder (such as a bank) at an agreed exchange rate within a certain time in the future. At the same time, the right holder also has the right not to perform the above sales contract.

There are two types of options: call and put

The right to purchase refers to the right of option buyers to purchase a certain amount of foreign exchange from the bank at an agreed exchange rate within a certain period of time in the future. The right to sell means that the buyer of an option has the right to sell a certain amount of foreign exchange to the bank at an agreed exchange rate within a certain period of time in the future. Of course, in order to obtain the above-mentioned buying and selling rights, the buyer of the option must pay a certain fee to the seller of the option, which is called premium-um. Since the buyer of the option has the right to decide whether to buy or sell in the future, the seller of the option bears the risks that may be caused by exchange rate fluctuations, and the insurance costs compensate for the possible losses caused by the exchange rate risk. This insurance premium is actually the price of the option. There are three main factors that determine the price of an option. One is the length of the option period. The second is the difference between the market spot exchange rate and the exchange rate agreed in the option contract. The third is the degree of expected exchange rate fluctuations. According to the time limit for exercising power, options can be divided into two types: European options and American options. European options means that the buyer of the option can only exercise the right to buy and sell currencies at the agreed exchange rate on the second working day before the expiry date of the option. However, American options are more flexible and can exercise the right to buy and sell on any day before the expiration date of the option, so the cost is also higher. At present, domestic banks only provide European options trading.

The advantage of foreign exchange options is that they can lock in future exchange rates and provide foreign exchange protection. Because of its greater flexibility, it can also obtain favorable opportunities when exchange rate changes develop in a favorable direction. However, the purchase of options requires a handling fee. If the option is not executed when it expires, it will increase business costs.