FX options are an alternative hedging instrument to forward contracts. Options give more flexibility and are often used where there is a lower level of certainty in the expected exposures, or if there is a poor track record in the accuracy of forecasts for actual exposures. There is a cost to purchasing an option, called premium, and is akin to the premium on an insurance policy. The owner/holder/purchaser of an option has all of the rights to exercise the option but is not obligated to do so. If at maturity the option is “in-the-money” the option is exercised. If the option is “out-of-the-money” the owner of the option will choose not to exercise the option.
How Hedgebook helps:
Hedgebook is used to record, report and value FX options, including the split between time and intrinsic value. The valuation of an FX option clearly shows the spot rate, forward rate and volatility used in the calculation.
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