The concept of currency options in Currencies Trading is quite similar to index options.

Specifications of US Dollar – Euro optionsSimilar to index options, currency options in currencies trading have four predetermined specification:

1. The underlying asset – in US dollar- euro options, for example, the underline asset is €62,500
(62,500 euros).

2. The option type – C (Call) or P (Put).

3. The strike price – the price that the investor purchasing the option must pay when exercising the option.

4. The expiration date – in the case of US dollar-euro options, the Friday preceding the third Wednesday of the expiry month.

 Underlying Currency AUD GBP CAD EUR JPY CHF Contract Size 50,000 31,250 50,000 62,500 6,250,000 62,500

Abbreviated Option Name

Each type of option has a special symbol, and each strike price has its own ticker symbol. The symbol for US dollar-euro options is ECU. A letter designating the month and the strike price is added to that symbol.

Underlying asset price

The underlying asset price is calculated by multiplying the most recent dollar-euro exchange rate by the number of euros. For examples, if the exchange rate is \$1.20/€1, then the value of the underlying assets is \$75,000.

Exercise price

The exercise price is denoted in multiples of \$0.01. A strike price of 120 means \$1.20/€1. For example, a Put 120 option confers on its owner the right to purchase €62,500 at \$1.20/€1.

The premium is calculated by multiplying the contract price by the size of the contract. For example, the price of a Put 120 is \$0.002/€1. The premium to be paid will be calculated by multiplying the option price by the contract size: 0.015 x 50,000 = \$750

Uses of USD – Euro Options

Consider the following:

1. On January 1, 2008, the dollar was traded at \$1.50/€1.

2. On that same day, an investor had \$150,000 in cash, equivalent to €100,000.

3. The money was invested in a savings account bearing a 1% monthly interest.

4. The investor knew that he would need €100,000 on December 31, 2008. It was therefore important for him to maintain the value of his assets in Euro terms.

The investor purchased two C EUR 150 options (each option protects €50,000) for the month of December. The price was \$0.015/€1.

Each option gave him the right to purchase €50,000 at \$1.50/€1. The total premium per option is: The total cost of the two option is therefore \$1,500. If the dollar reaches \$1.60/€1 by December 31, 2008, then the investor will have \$167,500 at that time, which is equivalent to €104,688.

In this case, the investor not only maintains the value of his money, but he also earns on it. Of course, if the dollar-euro exchange rate falls, or remains at \$1.50/€1.,then the investor loses money ( since he paid \$1,500 for the options).

Calculating the profit on the option

 Price of the underlying asset \$160,000 Strike price -\$150,000 Profit \$10,000