At Gulf Bank, new products and services is an ongoing process. An option is a contract between two parties that gives the buyer the right but not the obligation to buy or sell a currency, commodity or a financial instrument at a specific price on a specific date in the future. To enjoy this right, the buyer will pay a small percentage known as the premium.

 

Like other instruments, currency options are commonly used for hedging purposes as well as for pure trading. This has become one of the most important and flexible instruments in the foreign exchange market.

 

Options are mainly classified into 2 types, Calls and Puts.

A call gives the buyer of the option the right to buy the underlying currency, commodity or any other instrument, while the buyer of a put has the right to sell the underlying.

 

The maximum a buyer can lose is the premium he pays for the option, where as the risk facing the seller is theoretically unlimited. The seller is obliged to deliver the underlying at the contracted price regardless of the prevailing market price whenever the option is exercised.

 

The contracted price or exchange rate at which the contract will be fulfilled is called the Strike price.

 

In case of a call option, the strike price is said to be out of the Money when the strike price is higher than the prevailing market price, and it is said to be in the Money if the strike price is lower than the prevailing market price, and it is vice versa for a put option.

Description

• Using an option for hedging gives the holder protection against adverse exchange rate movements with the flexibility to profit from favorable exchange rate movements. Risk is limited to the premium paid.
• Options act as an insurance policy against the risk of price fluctuation and volatility.
• Using an option for trading gives the holder the opportunity to position himself for a big market move even when he does not know when this move will occur or in which way.
• Participants in the foreign exchange options market include all the key players in the global financial markets.
• Corporate clients use them to manage their foreign exchange risk resulting from payments and receivables in foreign currencies.
• Investors use them to hedge their exposure in foreign securities and for trading purposes.