The Benefits of Currency Trading

Have you ever heard of a foreign exchange option?  Do not be disheartened if you haven't, because even some seasoned traders somehow end up going their whole careers without fully exploring this kind of forex trade. As you learn forex, you'll pick up on lots of these things. 

Generally this is thanks to the fact that, until very recently, currency exchange options were typically used by huge corporations that had deals in multiple currencies and were looking to hedge their likely losses and rein in their risks.  

On a basic level, understanding currency exchange options themselves is fairly simple.  A choice is basically just a contract that allows the holder a right to buy ( or in a few cases, sell ) a particular currency at a pre-agreed price and a pre-agreed time, with no regard for what the particular market price could be at that point.  

naturally, this is a very fascinating offer because it implies the holder of the option stands to gain if the price that they agreed to buy or sell a currency at is favorable compared to the market price at the time.  As such, it should come as no surprise that there's an initial cost for options to make it an interesting offer for both parties ( i.e.  The holder and the writer of the option ).  

In brief, if you are holding a choice to trade US$ for Euros at 1.4 and the present market price is 1.6, then you stand to gain tons!  If however this market price is 1.2 or something then you could simply not exercise the option and all you would have lost is the opening cost.  

Generally, the pricing and valuation system of options is pretty complicated, and so it can take time and experience to completely appreciate it.  Nowadays though, there is another sort of option which has popped up called the 'digital option', and that is seen to be more accessible by casual traders.  

With digital options, you choose whether a given exchange rate is going to move up or down, and also decide what type of payoff you need.  Assuming you believe the EU Buck ( which is trading at 1.44 will move to 1.46 inside four months, and you decide that you would like a payoff of $1,000, you'd then have to find out how much a choice of that variety would cost.  

For the moment, let's just say that it might cost $100 and this would imply that if you're right, you get $1,000, and if you're wrong, all you have lost is the primary $100 the option cost.  

Fully appreciating the value of options is something that many small-time traders have adifficult hard~ heavy} time with.  Frankly, it could be a lot of a headache to control many options in multiple currencies, and so if you're pondering beginning, just keep it simplistic for now.  

Later when you get a better grasp of the ropes, you can move on to bigger and more diverse option investments.

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