Detailed Information

An FX Option is the right (not the obligation) to exchange a currency for another as at a specific future date, or in an agreed time-period during the term of the option, at a pre-set rate (strike price) and volume. The option buyer pays an option premium to the seller for that right.

The basic types of options are

• call - for currency purchases
• put - for currency sales

Example

A company that exports its products (revenues in EUR) and pays for raw materials in CZK, knows that it will collect EUR 1,000,000 in 3 months. It needs to know the exchange rate for calculating the price of its products, but cannot estimate where the exchange rate will be in 3 months. It is not 100% certain that the contract will indeed be performed and it does not want to assume an FX risk. The minimum FX rate accepted by the client is 24.600 CZK/EUR.

The solution is to enter into an FX Option transaction, purchasing a put option with foreign currency in 3 months and a strike price of 24.600. The client pays an option premium of EUR 12,000 to the bank for this contract .

It is evident that if the market rate on the option maturity date is 24.200 CZK/EUR (i.e., below the strike price level), the client will exercise the option and sell EUR 1,000,000 to the bank at the rate of 24.600 CZK/EUR.

But if the exchange rate on the option maturity date is e.g. 25.100 CZK/EUR (i.e., above the strike price level), the client will not exercise the option contract and sell the EUR 1,000,000 at the spot market exchange rate.

Advantages

• In the case of favourable exchange rate developments, the contract does not have to be exercised
• Participation only in positive FX rate developments
• Can be arranged over the telephone

Notice about potential risks

• An immediate expense for the option buyer in the form of the option premium paid at the time the transaction is arranged

• The heightened client-protection provisions based on the European Parliament and the Council Directive 2014/65/EU "The Market in Financial Instruments Directive II" - MiFID II apply to this product.

Contact information

Head of the Global Markets

Global Market Sales

Trading in FX and Interest-Rate Instruments