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World Currency Options

Many people think of the stock market when the word options is mentioned, however the forex market also offers the opportunity to trade these unique instruments which bridge the various worlds of interbank exchange, retail forex and currency derivatives. Trading in currency options started in the late 1970’s and early 1980’s in the established futures exchanges in London, Philadelphia and Chicago. At the time these were purely designed for the major banks to offer to international clients as hedging instruments, when buying and selling significant sums of foreign currency. These were typically where goods or services required payment in the future, but with a foreign currency, and generally where large sums of money were involved. In simple terms the option contract set the price for the currency at some point in the future, thus allowing the company to remove the risk of having to pay more, should the exchange rate move unfavourably by the due date for payment. Of course this also removes the chance that the rate might go in your favour, making the payment cheaper, but in general large companies are not interested in currency speculation, but in fixing future costs.

A major change occurred in the early 1990’s as currency options moved into the mainstream world and were soon widely adopted on the trading floors and exchanges, and trading in more unusual  options began to develop at a rapid pace. However, these trading instruments still tended to be the  preserve of specialist professional traders with significant cash reserves, and with real cash changing hands for physical delivery of the option contracts.  The recent dramatic growth in online trading for the small retail speculator, is having a knock on effect into the world of currency options, as brokers and exchanges are starting to see the opportunities to develop what is a relatively new market, for both traders and investors. The problem of course is that as any new markets evolve and develop, different people use different terms to mean the same thing, making it almost impossible for the inexperienced trader ( or even those in the industry) to make sense of all the terminology. I have therefore tried with this site, ( as with all my others ) to explain things as clearly and as simply as possible, the terms, the markets, the potential risks and rewards, but I can honestly say that this is one of the most difficult so far – the reason is simple – in a developing market new entrants like to try to differentiate their product or service, by calling it something different, introducing yet more confusion. In addition, as I’m sure you already know, the forex market is largely unregulated, so almost anything goes ( and generally does!) – the same applies to currency options, and seems likely to continue, if and until the entire market is regulated ( which is unlikely in the near future! )