How many lots does a Forex option represent?
Tuesday, December 10, 2013
, Posted by Ryanita at 12:59 AM
Qwerty
I know that a stock option is a contract that gives the holder the right to buy (or sell) shares, usually 100, but what about Forex options do they give the holder the right to buy (or sell) 100 lots of a currency?
Answer
Most of the FX options are traded in the OTC market. It's huge and it's filled with big players. In fact, the notional size of the OTC options traded in a year is in the 100's of Trillions of dollars. Unfortunately, you can't participate in this market because it's for institutions.
You can buy options on FX futures contracts. In lots of ways these are cleaner anyway, because there is no settlement risk and no counterparty risk. Also a futures contract quotes the forward price of the currency (almost, if you're a pro you will note that there is a subtle difference). The forward price of the currency is the price you could lock in by converting at the current exchange rate and investing in risk-free bonds denominated in the foreign currency. Basically, currency is expected to depreciate in countries with high interest rates relative to currencies from countries with low interest rates. It makes life easier to not have to worry about forward pricing when you are trading options on FX.
Anyway, an option on an FX futures contract gives you the right to buy or sell one futures contract at the strike price. Thus if you exercise an in-the-money call (put) option on an FX futures contract, you get a long (short) position in a futures contract and some money in your margin account. FX futures contracts have well-defined sizes, for example, a contract on the Euro is $125,000.
You need to know that these markets are filled with people with very deep understandings of the options and FX movements and it is unlikely that you will be able to beat them for money.
Most of the FX options are traded in the OTC market. It's huge and it's filled with big players. In fact, the notional size of the OTC options traded in a year is in the 100's of Trillions of dollars. Unfortunately, you can't participate in this market because it's for institutions.
You can buy options on FX futures contracts. In lots of ways these are cleaner anyway, because there is no settlement risk and no counterparty risk. Also a futures contract quotes the forward price of the currency (almost, if you're a pro you will note that there is a subtle difference). The forward price of the currency is the price you could lock in by converting at the current exchange rate and investing in risk-free bonds denominated in the foreign currency. Basically, currency is expected to depreciate in countries with high interest rates relative to currencies from countries with low interest rates. It makes life easier to not have to worry about forward pricing when you are trading options on FX.
Anyway, an option on an FX futures contract gives you the right to buy or sell one futures contract at the strike price. Thus if you exercise an in-the-money call (put) option on an FX futures contract, you get a long (short) position in a futures contract and some money in your margin account. FX futures contracts have well-defined sizes, for example, a contract on the Euro is $125,000.
You need to know that these markets are filled with people with very deep understandings of the options and FX movements and it is unlikely that you will be able to beat them for money.
How do I determine certain popular currency quotes?
Iyngaran M
How do I determine certain popular currency quotes?
For example, the exchange rate of GBP and USD is normally GBP/USD, the exchange rate of AUD and USD is normally AUD/USD, however, the exchange rate of SGD and USD is normally USD/SGD.. So i want to know the popular currency quotes for the following exchange rate pairs :
AUD and GBP
EUR and AUD
NZD and GBP
EUR and NZD
GBP and EUR
Thank you.
Answer
That's a good question. There is a hierarchy in ranking currencies. There is some logic involved, but the ranking is mostly traditional. In the Forex market, the world's most important currency was traditionally (prior to WWII) the British Pound. Therefore, the GBP was always placed first in currency pairs ie. GBP/USD. When the U.S. became the world's most important country, after WWII, the cross was never changed to USD/GBP. GBP/USD is still used exclusively.
Some British Dominions were so closely linked to the U.K. that their currencies also took precedence in pairs, such as AUD/USD and NZD/USD. This was despite the fact that Australia's and New Zealand's economies were not even comparable in size to the U.S. You will almost never see USD/NZD quoted in the Forex Market.
In the Market, the Canadian Dollar is always quoted as USD/CAD, but at the consumer level, it is often quoted the other way around; as CAD/USD.
When the Euro came into existence, it was decided that since it was the national currency of many wealthy, powerful developed countries such as France, Germany and Italy, it should take precedence even over the British Pound and the US Dollar. Therefore, the Euro Pound cross is quoted as EUR/GBP, not GBP/EUR. And it is EUR/USD.
To answer your other pairs, they are:
GBP/AUD
EUR/AUD
GBP/NZD
EUR/NZD
You might find them quoted in reverse in local newspapers or on local tv, but those are the official pairs.
That's a good question. There is a hierarchy in ranking currencies. There is some logic involved, but the ranking is mostly traditional. In the Forex market, the world's most important currency was traditionally (prior to WWII) the British Pound. Therefore, the GBP was always placed first in currency pairs ie. GBP/USD. When the U.S. became the world's most important country, after WWII, the cross was never changed to USD/GBP. GBP/USD is still used exclusively.
Some British Dominions were so closely linked to the U.K. that their currencies also took precedence in pairs, such as AUD/USD and NZD/USD. This was despite the fact that Australia's and New Zealand's economies were not even comparable in size to the U.S. You will almost never see USD/NZD quoted in the Forex Market.
In the Market, the Canadian Dollar is always quoted as USD/CAD, but at the consumer level, it is often quoted the other way around; as CAD/USD.
When the Euro came into existence, it was decided that since it was the national currency of many wealthy, powerful developed countries such as France, Germany and Italy, it should take precedence even over the British Pound and the US Dollar. Therefore, the Euro Pound cross is quoted as EUR/GBP, not GBP/EUR. And it is EUR/USD.
To answer your other pairs, they are:
GBP/AUD
EUR/AUD
GBP/NZD
EUR/NZD
You might find them quoted in reverse in local newspapers or on local tv, but those are the official pairs.
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