Foreign Currency Options. A foreign currency option is a contract giving the option purchaser (the buyer) the right, but not the obligation , to buy or sell a given amount of foreign exchange at a fixed price per unit for a specified time period (until the expiration date).
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Size of contract:€62,500
Exercise price0.90 ¢/€
Option price for purchase of €1 at 90¢ is 1.25 ¢Philadelphia Exchange Options
The indicated contract price is: €62,500 $0.0125/€ = $781.25
One call option gives the holder the right to purchase€62,500 for $56,250 (= €62,500 $0.90/€)
One call option gives the holder the right to purchase€62,500 for $56,250. This option costs $781.25.
A call option allows you to obtain only the “nice part” of the forward purchase.
Suppose you expect to receive 10,000,000 euros in 6 months. Without hedging, your underlying position looks like this
We think about volatility in prices as being a bad thing, and for most financial assets this is true. A stock whose price fluctuates wildly is less desireable (all other things the same) than a more stable stock. But an interesting thing about options is that their value is actually enhanced by volatility of the underlying asset value.