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 base currency exchange rates can make the bills that businesses need to pay to overseas suppliers greater than anticipated, and even small movements in currency rates can cause substantial international payments to rise considerably.

This can, in turn, make it harder for businesses to accurately budget their expenses and plan for future success. Our currency options allow businesses 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 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 can give you the opportunity to outperform current market rates but involve taking on additional risk.  

Moneycorp offers a variety of FX Options for businesses, ranging from Vanilla Options to more advanced instruments, such as Collars. For those wishing to hedge against currency fluctuations, options can offer a favourable solution - 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.

Why choose Moneycorp for your FX options?

Types of FX Options

What’s the difference between Vanilla Options and Premium-Free Options?

The key difference between Vanilla Options and Premium-Free Options is that Vanilla Options incur an upfront cost. In order to acquire the right (not the obligation) to buy or sell a currency pair at an agreed rate, you will first need to pay an Option premium.

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 be more favourable to you at the expiration date.

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

Whilst this might make them a more attractive FX Option to some businesses, 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 currency Option at the same time, which creates a potential obligation for the client to deal. The cost of one premium is thereby offset by the other.

What are the alternatives to FX Options?

There are several other foreign exchange solutions we offer at Moneycorp which may be appropriate to your business requirements. These strategies include Forward Contracts and Market Orders, both effective approaches that can enable businesses to manage currency market volatility alongside their business operating expenses.

Types of Premium-Free Options we offer

Collar Options

Some businesses use Collar Options to manage their exchange rate risk by limiting their exposure to fluctuations that occur within a certain FX rate range.

Collar Options provide protection against unfavourable FX currency rate movements. They involve the simultaneous purchasing of an Option (to protect against unfavourable currency movement) and selling an Option which limits participation in favourable movements but generates premium to enable the structure to be entered into at zero upfront cost.

The Strike Rates for both Options are typically set within a certain range around the current exchange rate, providing a "collar" or limited range within which the effective exchange rate for the client can fluctuate.   

If the exchange rate remains within this predefined range until the expiration date, the holder's position is effectively insulated from currency fluctuations.

If however, the current exchange rate moves beyond the range, the Collar Option will protect against the adverse movement but also limit the potential financial gains that could be achieved if the rate moves in a favourable direction.

Participating Forward Contracts

Participating forwards are 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 expiry date.

Participating Forwards require you to agree on a worst-case 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 Premium-Free FX options, such as Bonus Forwards 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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