Plain vanilla options
Foreign exchange options can be of two types: by buying a call option, we acquire the right to buy, by selling it, we assume a commitment to sell. By buying a put option, we acquire the right to sell, and by selling it, we assume a buying obligation.
Its buyer acquires the right (subject to payment of the option fee) to buy a predetermined amount of currency at a predetermined rate (strike rate) and expiration date.
In exchange for the option premium, the seller undertakes to sell a predetermined amount of currency at the predetermined rate (strike price) when the option is exercised.
| Buy call option | Right to buy the base currency |
| Sell call option | Obligation to sell the base currency |
- Buy call optionRight to buy the base currency
- Sell call optionObligation to sell the base currency
Example transaction for buying a call option (right to buy)
- After 6 months, you must have a significant amount of euros, however, in the course of your economic activity, you will have to generate forint revenues. In order to eliminate the risk of future fluctuations in the exchange rate, it would set a price level at which it would buy protection against an unfavourable exchange rate movement.
- In your opinion, the EUR/HUF exchange rate will rise in the coming half-year.
- By paying the option premium, you acquire the right to buy the amount of euros specified in the trade at the strike price when the option expires.
- You must pay the option premium on the second business day after the trade is made.
| Transaction parameters | |
|---|---|
| Duration | 6 months |
| Currency pair | EUR/HUF |
| Amount | EUR 500,000 |
| Spot rate EUR/HUF at the time of pricing | 329.00 (Reuters: EURHUF=D3) |
| Strike | 335.00 |
| Volume-based option premium in fillér | 320 |
| Option premium expressed in HUF | HUF 1,600,000 |
- Transaction parametersTransaction parameters
- Duration6 months
- Currency pairEUR/HUF
- AmountEUR 500,000
- Spot rate EUR/HUF at the time of pricing329.00 (Reuters: EURHUF=D3)
- Strike335.00
- Volume-based option premium in fillér320
- Option premium expressed in HUFHUF 1,600,000
Example transaction for selling a call option (right to buy)
- You expect the EUR/HUF exchange rate to be below a certain level (strike rate) in 6 months.
- Through the option premium, you can earn extra revenue by choosing a strike rate at which the option will not be exercised or at which you would have originally intended to sell the euro for forints.
- In exchange for the option premium, you take the risk that if the market EUR/HUF exchange rate at maturity is above the strike price, you will have to sell the amount of euro specified in the option at the strike price.
- The option premium will be credited to you on the second business day after the trade is made.
| Transaction parameters | |
|---|---|
| Duration | 6 months |
| Currency pair | EUR/HUF |
| Amount | EUR 500,000 |
| Spot rate EUR/HUF at the time of pricing | 329.00 (Reuters: EURHUF=D3) |
| Strike | 340.00 |
| Volume-based option premium in fillér | 155 |
| Option premium expressed in HUF | HUF 775,000 |
- Transaction parametersTransaction parameters
- Duration6 months
- Currency pairEUR/HUF
- AmountEUR 500,000
- Spot rate EUR/HUF at the time of pricing329.00 (Reuters: EURHUF=D3)
- Strike340.00
- Volume-based option premium in fillér155
- Option premium expressed in HUFHUF 775,000
Its buyer acquires the right (subject to payment of the option fee) to sell a predetermined amount of currency at a predetermined rate (strike rate) and expiration date.
In exchange for the option premium, the seller undertakes to buy a predetermined amount of currency at the predetermined rate (strike price) when the option is exercised.
| Buy put option | Right to sell the base currency |
| Sell put option | Obligation to buy the base currency |
- Buy put optionRight to sell the base currency
- Sell put optionObligation to buy the base currency
Example transaction for buying a put option (right to sell)
- After 6 months, you will have to spend a significant amount of forint, however, in the course of your economic activity, you will generate euro revenues. In order to eliminate the risk of future fluctuations in the exchange rate, it would set a price level at which it would buy protection against an unfavourable exchange rate movement.
- In your opinion, the EUR/HUF exchange rate will fall in the coming half-year.
- By paying the option premium, you acquire the right to sell the amount of euros specified in the transaction at the strike rate when the option expires.
- The option premium must be paid on the second business day following the conclusion of the transaction.
| Transaction parameters | |
|---|---|
| Duration | 6 months |
| Currency pair | EUR/HUF |
| Amount | EUR 500,000 |
| Spot rate EUR/HUF at the time of pricing | 329.00 (Reuters: EURHUF=D3) |
| Strike | 325.00 |
| Volume-based option premium in fillér | 200 |
| Option premium expressed in HUF | HUF 1,000,000 |
- Transaction parametersTransaction parameters
- Duration6 months
- Currency pairEUR/HUF
- AmountEUR 500,000
- Spot rate EUR/HUF at the time of pricing329.00 (Reuters: EURHUF=D3)
- Strike325.00
- Volume-based option premium in fillér200
- Option premium expressed in HUFHUF 1,000,000
Example transaction for selling a put option (right to sell)
- You expect the EUR/HUF exchange rate to be above a certain level (strike price) in 6 months.
- Through the option premium, you can earn extra revenue by choosing a strike rate at which the option will not be exercised or at which you would have originally intended to buy the euro for forints.
- In exchange for the option premium, you take the risk that if the market EUR/HUF exchange rate at maturity is below the strike price, you will have to buy the amount of euro specified in the option at the strike price.
- The option premium will be credited to you on the second business day after the trade is made.
| Transaction parameters | |
|---|---|
| Duration | 6 months |
| Currency pair | EUR/HUF |
| Amount | EUR 500,000 |
| Spot rate EUR/HUF at the time of pricing | 329.00 (Reuters: EURHUF=D3) |
| Strike | 322.00 |
| Volume-based option premium in fillér | 110 |
| Option premium expressed in HUF | HUF 550,000 |
- Transaction parametersTransaction parameters
- Duration6 months
- Currency pairEUR/HUF
- AmountEUR 500,000
- Spot rate EUR/HUF at the time of pricing329.00 (Reuters: EURHUF=D3)
- Strike322.00
- Volume-based option premium in fillér110
- Option premium expressed in HUFHUF 550,000
Benefits
For purchased options
- You can benefit from a positive shift, so you can earn extra returns by taking risks on the foreign exchange rate.
- You can reduce or completely eliminate the exchange rate risk arising from your currency exposure in a personalised and structured way.
- The loss from a purchased option cannot be greater than the amount of the premium paid for the option.
- The option can be closed with a reverse trade before expiry.
For sold options
- You can also benefit from market expectations that you would not be able to take advantage of with other investment products.
- The option premium will be credited on the second day after the conclusion of the trade.
- The client can earn extra income through the option premium by choosing a strike price at which the option will not be exercised or at which the client would have traded as originally intended.
- The option can be closed with a reverse trade before expiry.
Risks
For purchased options
- The cost of the option.
- In case of a positive move, the cost is higher compared to the forwards transaction.
For sold options
- The maximum amount of profit on the written option is the amount of the option premium, while the loss can be unlimited.
- The cost of closing an option depends on specific market conditions, which may exceed the cost of closing forwards with the same nominal value.
- It is a complex product, so identifying risks requires greater skill on
the part of clients.
Experts
If you have any questions, feel free to contact us.
János Imrei
Head of Department
Edit Orsolya Kovács-Gyimóti
Deputy Head of Department
Borbála André
Sales
Nóra Gordos
Sales
István Fodor
Sales
Péter Huck
Sales
OTP Trader
Flóra Zsófia Margaritisz
Sales
OTP Trader
Nóra Simon
Sales
OTP Trader
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