An introduction to FX options

Why would I need an FX option?

In a world in which foreign currency exchange rates are in a constant state of flux, companies with international dealings run the risk of losing substantial sums of money if they fail to hedge their exposure to these shifts. Changes in exchange rates can make the bills that they need to pay to overseas suppliers greater than anticipated, and even small increases in currency rates can cause substantial international payments to rise considerably.

This can, in turn, make it harder for businesses to prepare accurately budget their expenses and plan for future success. Our currency options have allowed businesspeople to reduce their downside risk and thereby make it easier for them to focus on what matters most: making their business thrive and grow.

What is an FX option?

Foreign exchange options are incredibly powerful tools that can be used to manage your business’s currency exchange strategy. The instrument that you choose will depend largely on your circumstances and needs: whilst some of these options are designed to mitigate your exchange-rate risk, there are others that are better-suited to helping you to secure a better deal than you would have received if you’d instead used market rates.

We offer a variety of FX options, ranging from the vanilla option to more advanced instruments, such as zero-cost collars. Currency options are often the best choice for those who wish to exchange large amounts of money – and this is especially true when the currencies in question are subject to volatile movements, there is great political uncertainty and/or if trading conditions are unpredictable.

There are a number of foreign exchange options that we can offer that can help you and your business, and we can help you find options that are tailored to your business goals and appetite for risk.

Why choose Moneycorp for your FX options?

Types of FX options

What’s the difference between vanilla options and zero-cost options?

The key difference between vanilla options and zero-cost options is that vanilla options incur an upfront cost. In order to acquire the right (as opposed to the obligation) to buy or sell a currency in exchange for another at an agreed rate, you will first need to pay an option premium to the counterparty who sold you that option.

This premium is non-refundable, even if you decide that you’d rather not exercise your option on the expiry date. This is important, because there is a possibility that the prevailing FX spot rate might become more favourable to you after you enter into the FX Vanilla Option; if, on the expiry date of the vanilla option, the prevailing rate is still more favourable, and the FX Vanilla Option is, therefore, not exercised, you would have been financially better off (to the extent of how much you paid for that upfront premium).

Zero-cost options, as the name might suggest, are a little different in this regard: they have no such upfront cost, and thus are better suited to those who do not wish to pay a premium.

Whilst this might make them a more attractive FX option to some traders, they are also more complex in nature: in order to offset the cost of purchasing the right to buy foreign currencies at a more favourable rate, it is necessary to sell another option of equal value at the same time. The cost of one premium is thereby offset by the other.

What are the alternatives to FX orders?

There are several other foreign exchange solutions that are available to you at Moneycorp. These FX options include forward contracts, FX options and a range of zero-cost options. These are all effective forex option trading strategies that have allowed our clients to save substantial sums of money and reduce their business operating expenses.

Types of zero-cost options we offer

Collar options

Collar options are hedging strategies that you can use to manage your exchange rate risk in the currency markets by limiting your exposure to fluctuations that occur within a certain range.

You receive protection from collar options if the rate of exchange is lower than the worst-case rate stipulated in your contract. If, on the other hand, the rate of exchange is better than the best-case rate that was specified, you have an obligation to deal at the best-case rate. If the rate of exchange falls between the two levels, you have the option of trading at the prevailing rate.

Participating Forward Contracts

Participating forwards are very similar to forward contracts, but with one key difference: they allow you to benefit from favourable moves in the currency markets that occur between the date of the contract and the date of the transaction.

Participating forwards require you to agree on a worst-case forex rate (the 'strike rate'). This means that you can exchange at the protected rate should the currency pair drift in an unfavourable direction; you can also participate in favourable movements for a percentage of the structure (this is usually 50%, but it can be tailored to your requirements).

& more than 20 other premium-free options

Call 0203 733 1022 to find out more about how other zero-cost FX options, such as knock-out options and extendable FX options, can help your business manage its exchange rate risk.

Please be advised that our Options products may not be appropriate for all prospective clients.

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