Foreign exchange options (also known as FX, forex or currency options) are contracts where the buyer has the right, but not the obligation, to exchange currency on a certain future date at the exchange rate and in the amount fixed at the time of entering into transaction. Option transactions are entered into as a hedge against an unfavourable probable future event. The buyer pays the seller a premium to have such an opportunity.
Types of FX Options
- Call option entitles the holder to buy the underlying currency at the rate fixed in the transaction, thus hedging against the risk of a rise in exchange rate;
- Put option entitles the holder to sell the underlying currency at the rate fixed in the transaction, thus hedging against the risk of a fall in exchange rate.
- safeguarding the company against unfavourable exchange rate fluctuations and potential loss;
- benefiting from favourable exchange rate fluctuations;
- locking in the maximum expenses and the bid price;
- selecting top or bottom limit for specific exchange rates.
Risks associated with FX option transactions:
- the paid premium will not be refunded if the option is not exercised during the period covered by the transaction;
- in case of early termination of the transaction, the customer may incur expenses or earn income, the size of which depends on forex market situation then prevailing.
The need for collateral is assessed on case-by-case basis, depending on the duration of transaction and currencies involved in the transaction.
- holding a current account with Swedbank,
- signing the Agreement for Financial Market Transactions with the bank.