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Foreign currency option

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Definition of Foreign currency option

Foreign Currency Option Image 1

Foreign currency option

An option that conveys the right to buy or sell a specified amount of foreign
currency at a specified price within a specified time period.



Related Terms:

Garmen-Kohlhagen option pricing model

A widely used model for pricing foreign currency options.


Abandonment option

The option of terminating an investment earlier than originally planned.


American option

An option that may be exercised at any time up to and including the expiration date.
Related: European option


American option

An option that can be exercised any time until its
expiration date. Contrast with European option.


American-style option

An option contract that can be exercised at any time between the date of purchase and
the expiration date. Most exchange-traded options are American style.



Arbitrage-free option-pricing models

Yield curve option-pricing models.


Asian currency units (ACUs)

Dollar deposits held in Singapore or other Asian centers.


Foreign Currency Option Image 2

Asian option

option based on the average price of the asset during the life of the option.


Bargain-purchase-price option

Gives the lessee the option to purchase the asset at a price below fair market
value when the lease expires.


Barrier options

Contracts with trigger points that, when crossed, automatically generate buying or selling of
other options. These are very exotic options.


Basket options

Packages that involve the exchange of more than two currencies against a base currency at
expiration. The basket option buyer purchases the right, but not the obligation, to receive designated
currencies in exchange for a base currency, either at the prevailing spot market rate or at a prearranged rate of
exchange. A basket option is generally used by multinational corporations with multicurrency cash flows
since it is generally cheaper to buy an option on a basket of currencies than to buy individual options on each
of the currencies that make up the basket.


Binomial option pricing model

An option pricing model in which the underlying asset can take on only two
possible, discrete values in the next time period for each value that it can take on in the preceding time period.


Black-Scholes option-pricing model

A model for pricing call options based on arbitrage arguments that uses
the stock price, the exercise price, the risk-free interest rate, the time to expiration, and the standard deviation
of the stock return.


Blocked currency

A currency that is not freely convertible to other currencies due to exchange controls.


cafeteria plan a “menu” of fringe benefit options that include

cash or nontaxable benefits


Call an option

To exercise a call option.


Foreign Currency Option Image 3

Call option

An option contract that gives its holder the right (but not the obligation) to purchase a specified
number of shares of the underlying stock at the given strike price, on or before the expiration date of the
contract.
Call premium
Premium in price above the par value of a bond or share of preferred stock that must be paid to
holders to redeem the bond or share of preferred stock before its scheduled maturity date.


Call Option

A contract that gives the holder the right to buy an asset for a
specified price on or before a given expiration (maturity) date



call option

Right to buy an asset at a specified exercise price on or before the exercise date.


Compound option

option on an option.


Controlled foreign corporation (CFC)

A foreign corporation whose voting stock is more than 50% owned
by U.S. stockholders, each of whom owns at least 10% of the voting power.


Covered or hedge option strategies

Strategies that involve a position in an option as well as a position in the
underlying stock, designed so that one position will help offset any unfavorable price movement in the other,
including covered call writing and protective put buying. Related: naked strategies


Currency

Money.


Currency arbitrage

Taking advantage of divergences in exchange rates in different money markets by
buying a currency in one market and selling it in another market.


Currency basket

The value of a portfolio of specific amounts of individual currencies, used as the basis for
setting the market value of another currency. It is also referred to as a currency cocktail.


Currency future

A financial future contract for the delivery of a specified foreign currency.


Currency option

An option to buy or sell a foreign currency.


Foreign Currency Option Image 4

Currency risk

Related: Exchange rate risk



Currency risk sharing

An agreement by the parties to a transaction to share the currency risk associated with
the transaction. The arrangement involves a customized hedge contract embedded in the underlying
transaction.


Currency selection

Asset allocation in which the investor chooses among investments denominated in
different currencies.


Currency swap

An agreement to swap a series of specified payment obligations denominated in one currency
for a series of specified payment obligations denominated in a different currency.


Dealer options

Over-the-counter options, such as those offered by government and mortgage-backed
securities dealers.


Delivery options

The options available to the seller of an interest rate futures contract, including the quality
option, the timing option, and the wild card option. Delivery options make the buyer uncertain of which
Treasury Bond will be delivered or when it will be delivered.


Devaluation A decrease in the spot price of the currency



Doubling option

A sinking fund provision that may allow repurchase of twice the required number of bonds
at the sinking fund call price.


Down-and-in option

Barrier option that comes into existence if asset price hits a barrier.


Down-and-out option

Barrier option that expires if asset price hits a barrier.


Dual-currency issues

Eurobonds that pay coupon interest in one currency but pay the principal in a different
currency.


Elasticity of an option

Percentage change in the value of an option given a 1% change in the value of the
option's underlying stock.


Embedded option

An option that is part of the structure of a bond that provides either the bondholder or
issuer the right to take some action against the other party, as opposed to a bare option, which trades
separately from any underlying security.


Equity options

Securities that give the holder the right to buy or sell a specified number of shares of stock, at
a specified price for a certain (limited) time period. Typically one option equals 100 shares of stock.


Escalating Price Option

A nonqualified stock option that uses a sliding scale for
the option price that changes in concert with a peer group index.


Eurocurrency deposit

A short-term fixed rate time deposit denominated in a currency other than the local
currency (i.e. US$ deposited in a London bank).


Eurocurrency market

The money market for borrowing and lending currencies that are held in the form of
deposits in banks located outside the countries of the currencies issued as legal tender.


European Currency Unit (ECU)

An index of foreign exchange consisting of about 10 European currencies,
originally devised in 1979.


European option

option that may be exercised only at the expiration date. Related: american option.


European option

An option that can be exercised only on its expiration date.
Contrast with American option.


European-style option

An option contract that can only be exercised on the expiration date.


Exercising the option

The act buying or selling the underlying asset via the option contract.


Exit Options

A variety of options available to an investor to recover their invested capital and the return on their investment.


Foreign banking market

That portion of domestic bank loans supplied to foreigners for use abroad.


Foreign bond

A bond issued on the domestic capital market of anther company.


Foreign bond market

That portion of the domestic bond market that represents issues floated by foreign
companies to governments.


Foreign Corrupt Practices Act (FCPA)

a law passed by U.S. Congress in 1977 that makes it illegal for a U.S. company to engage in various “questionable” foreign payments and
makes it mandatory for a U.S. company to maintain accurate
accounting records and a reasonable system of internal
control


Foreign currency

foreign money.


Foreign currency translation

The process of restating foreign currency accounts of subsidiaries into the
reporting currency of the parent company in order to prepare consolidated financial statements.


Foreign direct investment (FDI)

The acquisition abroad of physical assets such as plant and equipment, with
operating control residing in the parent corporation.


Foreign equity market

That portion of the domestic equity market that represents issues floated by foreign companies.


Foreign exchange

currency from another country.


Foreign Exchange

The currency of a foreign country.


Foreign exchange controls

Various forms of controls imposed by a government on the purchase/sale of
foreign currencies by residents or on the purchase/sale of local currency by nonresidents.


Foreign exchange dealer

A firm or individual that buys foreign exchange from one party and then sells it to
another party. The dealer makes the difference between the buying and selling prices, or spread.


Foreign Exchange Market

A worldwide market in which one country's currency is bought or sold in exchange for another country's currency.


Foreign Exchange Reserves

A fund containing the central bank's holdings of foreign currency or claims thereon.


Foreign exchange risk

The risk that a long or short position in a foreign currency might have to be closed out
at a loss due to an adverse movement in the currency rates.


Foreign exchange swap

An agreement to exchange stipulated amounts of one currency for another currency
at one or more future dates.


Foreign market

Part of a nation's internal market, representing the mechanisms for issuing and trading
securities of entities domiciled outside that nation. Compare external market and domestic market.


Foreign market beta

A measure of foreign market risk that is derived from the capital asset pricing model.


Foreign Sales Corporation (FSC)

A special type of corporation created by the Tax Reform Act of 1984 that
is designed to provide a tax incentive for exporting U.S.-produced goods.


Foreign tax credit

Home country credit against domestic income tax for foreign taxes paid on foreign
derived earnings.


Futures option

An option on a futures contract. Related: options on physicals.


Greenshoe option

option that allows the underwriter for a new issue to buy and resell additional shares.


Hard currency

A freely convertible currency that is not expected to depreciate in value in the foreseeable future.


Heavenly Parachute Stock Option

A nonqualified stock option that allows a deceased option holder’s estate up to three years in which to exercise his or her
options.


Incentive Stock Option

An option to purchase company stock that is not taxable
to the employee at the time it is granted nor at the time when the employee
eventually exercises the option to buy stock.


Index and Option Market (IOM)

A division of the CME established in 1982 for trading stock index
products and options. Related: Chicago Mercantile Exchange (CME).


Index option

A call or put option based on a stock market index.


Interest Option

One of several investment accounts in which your premiums may be invested within your life insurance policy.


Intrinsic value of an option

The amount by which an option is in-the-money. An option which is not in-themoney
has no intrinsic value. Related: in-the-money.


Irrational call option

The implied call imbedded in the MBS. Identified as irrational because the call is
sometimes not exercised when it is in the money (interest rates are below the threshold to refinance).
Sometimes exercised when not in the money (home sold without regard to the relative level of interest rates).


Liquid yield option note (LYON)

Zero-coupon, callable, putable, convertible bond invented by Merrill


Liquid yield option note (LYON)

Zero-coupon, callable, putable, convertible bond invented by Merrill Lynch & Co.


Lookback option

An option that allows the buyer to choose as the option strike price any price of the
underlying asset that has occurred during the life of the option. If a call, the buyer will choose the minimal
price, whereas if a put, the buyer will choose the maximum price. This option will always be in the money.


Margin requirement (Options)

The amount of cash an uncovered (naked) option writer is required to
deposit and maintain to cover his daily position valuation and reasonably foreseeable intra-day price changes.


Multi-option financing facility

A syndicated confirmed credit line with attached options.


Multicurrency clause

Such a clause on a Euro loan permits the borrower to switch from one currency to
another currency on a rollover date.


Multicurrency loans

Give the borrower the possibility of drawing a loan in different currencies.


Naked option strategies

An unhedged strategy making exclusive use of one of the following: Long call
strategy (buying call options ), short call strategy (selling or writing call options), Long put strategy (buying
put options ), and short put strategy (selling or writing put options). By themselves, these positions are called
naked strategies because they do not involve an offsetting or risk-reducing position in another option or the
underlying security.
Related: covered option strategies.


Nonqualified Stock Option

A stock option not given any favorable tax treatment
under the Internal Revenue Code. The option is taxed when it is exercised,
based on the difference between the option price and the fair market
value of the stock on that day.


Option

Gives the buyer the right, but not the obligation, to buy or sell an asset at a set price on or before a
given date. Investors, not companies, issue options. Investors who purchase call options bet the stock will be
worth more than the price set by the option (the strike price), plus the price they paid for the option itself.
Buyers of put options bet the stock's price will go down below the price set by the option. An option is part of
a class of securities called derivatives, so named because these securities derive their value from the worth of
an underlying investment.


Option

See call option and put option


Option

A right to buy or sell specific securities or commodities at a stated
price (exercise or strike price) within a specified time. An option is a type of
derivative.


Option

Right to buy or sell a specified property at a specified amount at some time in the future.


Option-adjusted spread (OAS)

1) The spread over an issuer's spot rate curve, developed as a measure of
the yield spread that can be used to convert dollar differences between theoretical value and market price.
2) The cost of the implied call embedded in a MBS, defined as additional basis-yield spread. When added to the
base yield spread of an MBS without an operative call produces the option-adjusted spread.


Option elasticity

The percentage increase in an option's value given a 1% change in the value of the
underlying security.


Option not to deliver

In the mortgage pipeline, an additional hedge placed in tandem with the forward or
substitute sale.


Option premium

The option price.


Option price

Also called the option premium, the price paid by the buyer of the options contract for the right
to buy or sell a security at a specified price in the future.


Option seller

Also called the option writer , the party who grants a right to trade a security at a given price in
the future.



 

 

 

 

 

 

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