Forex options or currency options are a kind of options contract whose inherent asset is the rate of exchange between two particular currencies. Similar to other types of options contracts, forex options can be availed in different variants. Two of the well-known FX options are conventional options and binary or digital options. As the financial instruments for investment, FX options might be employed in a speculative manner or for hedging risk in the rate of exchange.
Conventional currency options are option contracts in which a purchaser can normally implement the terms and conditions of the contract before the expiration date if he or she believes that the market price of the inherent rate of exchange has accomplished its pinnacle (also known as call options) or the lowest point (called the put options). The return for the purchaser is dependent upon the difference between the strike price exchange rates, given that the market exchange rate moves in favor of the buyer. Taking a positive direction for granted, the payout sum is directly correlated with the magnitude of this difference.
Binary or digital options, also known as all-or-nothing options, offer exclusively two potential results: a predetermined payment of cash stipulated in the terms of the contract or no payment at all. In a binary FX option contract, a purchaser gets the payoff sum only when the market rate of exchange surpasses (call options) or is lower than (put options) the strike price rate of exchange upon expiration of the option. If the market exchange rate is not in favor of the buyer at expiration, he or she expects no return by any means.
The exchange rate in currency options consists of two currencies, one of which is virtually the currency in which the option contract is designated (for instance, US dollars). The strike price in a forex option is a distinct level for that rate of exchange (for instance, $1.61 per 1 GBP). The worth of the option contract relies upon the movement of the market rate of exchange with reference to the strike price.