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Currency option

A contract giving the right, not the obligation, to exchange one currency for another at a set rate on or before a set date.

FX options work like equity options with one twist: every call is simultaneously a put. A call on EUR/USD is the right to buy euros and sell dollars, which is identical to a put on dollars against euros, so desks specify both legs.

They are quoted in implied-volatility rather than price, and structured products such as risk reversals reveal whether the market is paying more to protect against a rise or a fall. Large option barriers near round numbers can anchor spot, because dealers hedging them buy weakness and sell strength.

Example: a EUR 10,000,000 three-month call struck at 1.1000 with spot at 1.0840 costs 0.9% of notional, about EUR 90,000. It breaks even at 1.1099.

Related: implied-volatility, big-figure, call-option

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Payoff of a long call at expiryA flat loss equal to the premium below the strike, turning upward at 45 degrees above it.Profit / loss per share08595115125Strike 105Max loss 3 — the premium paidBreakeven 108Profit keeps growingUnderlying price at expiry
Buying a call: payoff at expiry. A 105-strike call bought for 3 loses that whole 3 if the price finishes at or below 105, breaks even at 108, then gains a dollar for every dollar higher. The loss is capped at the premium; the upside is not capped.

Educational only, not advice. Spotted an error? Post in Site Feedback.