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Foreign Exchange Options

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Introduction to FX Options, (One Day)

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Foreign exchange options are widely used to hedge and trade risk in the FX market. But often sales staff find talking to clients about options is not easy. This is particularly the case if they are used to doing spot, forward and swap transactions. There is always the worry that the customer knows more. This workshop introduces foreign exchange options, this includes the terminology, how puts and calls work, what influences option prices and the risks and practical applications of FX options. The objective is to get sales talking. 

The workshop contains case study material which can include examples of transactions undertaken by the bank with clients. Prior knowledge of FX options is not required.

The workshop will cover:

  • A review of FX risk and hedging
  • An introduction to FX options terminology
  • How options work and what influences their price
  • Simple foreign exchange options strategies, the advantages and disadvantages
  • Combining calls and puts to produce different risk profiles, the advantages and disadvantages
  • Exotic FX options, what they are & how they can be used

Training will be in a workshop format. This will include a mixture of presentation and case study material. The course is designed for up to ten staff.

Below is a summary of the workshop content.

Morning

Introduction

  • Market Background
  • Traditional hedging techniques
  • Common perceptions
  • Hedging policy
  • Talking with customers
  • Alternatives

Option terminology and use

  • Call/put
  • Pay off profiles
  • Intrinsic & time value
  • ITM/OTM spot, forward
  • Premium
  • Exercise
  • Expiry
  • European style
  • Application of simple option strategies
  • Buying calls and selling puts
  • Advantages & disadvantages

Combination strategies

  • Combining options – buying one option and selling another
  • No free lunch – just altering the risk profiles
  • Examples and case studies
  • FX cylinders/risk reversals
  • Variations with a third option
  • Participating forwards

What influences option prices

  • Inputs to pricing
  • Strike
  • Forward rate
  • Time
  • Implied volatility
  • Smiles & skews

Afternoon

Option Deltas

  • Delta hedging – what it is

Exotic FX Options

  • Premium reduction

Barrier FX Options

  • Knock-outs
  • Knock-ins
  • Barriers
  • Cylinder and barrier
  • Casestudy

Compound Options

  • What they are
  • The risk in contract tenders
  • Using compound options
  • Casestudy

Average Rate Options

  • What they are
  • Lowering premium costs
  • Casestudy

Brief explanation of:

  • Digital options
  • Basket options
  • Contingent premium options

 

End of workshop & review

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