A Currency Options Primer

Posted by Allison on 13 April 2009, 11:00

The options segment of the foreign currency exchange market is a specific area of currency trading that many people find confusing.  It is an integral part of any comprehensive currency trading discipline, however, so every trader should take the time necessary to thoroughly understand the concept and execution of currency options.  A Currency Options Primer is specially written and designed to be a concise and easily understandable guide for traders wanting to better understand currency options.    

Taking a look at the currency options market

The currency options market can seem intimidating or complex to the beginning trader or even to experienced traders as well.  They are an important tool for managing risk exposure and hedging in the currency trading market, but they do require some specific knowledge in order to make the most of their potential benefits and minimize their potential risks.  As a tool for countering a currency market that is high in volatility, currency options are widely used and accepted to promote expanded risk management alternatives and activities.

In A Currency Options Primer, the author sets about providing the reader with all of the key information necessary for understanding and participating effectively in the currency options market.  It includes a thorough discussion of how the currency options market actually functions from day to day, as well as tips and guidance on understanding the huge array of currency options products available in the market.

The currency options market requires traders to use slightly different techniques than other portions of the currency market, including understanding a different set of terms, definitions, and jargon.  It is a bit of a different language, you might say, but can quickly and easily be picked up with the right information and study tool.  A Currency Options Primer is one of the best tools available for helping traders fully comprehend the currency options market in part because of the excellent information it contains and in part because it is so quick and easy to read and understand.

What will you find inside the book?

A Currency Options Primer is set up with numerous diagrams, glossaries, examples, and illustrations of concepts and techniques related to the currency options market.  Unlike some other books on this same subject, however, this book presents such vital information in very conversational language that is easy to read and understand.  Despite being a quick read and concise in its structure, the book does not skimp or skip on any important topic.  It is a comprehensive collection of advice and guidance that contains a wealth of information about the currency options market.

Each chapter of A Currency Options Primer explains all of the critical components and essential information of the topic at hand, allowing the reader to grasp the details without struggling through overly complicated or difficult content.  The chapters build on each other, layering on additional information in each section until, by the end of the book the reader fully understands how the currency options market really works.

One of the striking aspects of A Currency Options Primer is just how well the author has laid out the structure and the content of the book.  Some books on the topic of currency options and the currency options market use complicated language and confusing diagrams to communicate key information, but this book does not do that.  It uses very clear language and a logical progression of information to help the reader fully understand the concepts presented in chapter after chapter.

More details about the content of A Currency Options Primer

The structure of A Currency Options Primer is set up to present the content in three distinct parts:

Part 1:  Overview of the currency options market - This part includes a description and history of the foreign currency exchange market.  It includes chapter segments on the 24 hour global market; understanding the forward currency market as well as the spot currency market; an explanation of currency options; key milestones in the history and development of the foreign currency exchange market; the emergence of the currency options market; and much more.

Also included in Part 1 are comprehensive discussions of the basic structure of the foreign currency exchange market; comparisons among the spot, forward, and options markets; explanation and examples of currency pairs; banks, governments, corporations, and a full range of other major participants in the foreign currency exchange market; the key roles played by different types of participants in the currency market; the purpose of common activities and actions such as hedging, transaction exposure, economic exposure, funding, and market making; and more.

Finally, Part 1 ends with chapter segments on practical applications of currency options and common reasons for using currency options as a currency trading tool.  Hedging and speculation are compared and contrasted, and there is a very complete glossary of terms related to the foreign currency exchange market.

Part 2:  The essentials of currency options – This part includes detailed terminology and definitions related to the currency options market.  Examples include call option, put option, exercising options, strike price, strike selection, volatility, break even, and more.  Currency options are explained as an overall concept and as a specific market.  The market aspects of currency options are described and defined, including standardised and customised options; over the counter and exchange markets; specific features of each market; and comparisons among different markets and different types of options.

Also included in Part 2 are key pricing theories for currency options, such as theoretical valuation and the Black-Scholes model; how to price currency options without a computer model; the difference between intrinsic value and time value; forward rates and strike price; interest rates; ratios measuring price change to underlying assets and time decay, expressed as various Greek letters; and commonly used profit/loss and payoff diagrams.

Finally, Part 2 ends with chapter segments on the basic properties of currency options, such as values, put and call parity and synthetic positions; understanding the concept and applications of risk reversals; explanations of accepted conventions of the currency options market; and a detailed glossary of terms related to the essentials of currency options.

Part 3:  Assorted products for currency options – The range of currency option products available in the market is quite broad.  In general, products are divided into four main categories: vanilla, common, exotic, and structured currency.  Vanilla options include things such as cylinder, straddle, collar, and strangle options; long, short, participating forward, and ratio forward; and a number of extras that can be added to currency options in this category.

Common options include locked trade options; directional options; and precision options.  Exotic options include look back, ladder, barriers, chooser, baskets, multi-factor, digital, and more.  Structured currency options include trigger forward, at maturity trigger forward, double trigger forward, weekly reset forward, forward extra, wall, corridor, contingent premium, and more. 

Finally, Part 3 concludes with a full glossary of currency option terms as well as an option hedge matrix.  The matrix is especially helpful because it is a clear and easy to understand visual tool for helping the reader to understand all aspects of the currency options and the currency options market.

Concise, clear, and comprehensive

You might think a single book cannot be both concise and comprehensive at the same time, but happily A Currency Options Primer accomplishes this difficult task.  It clearly defines and explains all of the components and important aspects of currency options, even including several real world case studies to demonstrate concepts and components in action.  It is an excellent resource in terms of the thoroughness and accuracy of the content, as well as the readability and flow of the text.

Overall, this is one of the best resources available for learning all about currency options and the currency options market.  If you are new to the currency options market, or are looking for a quality book on currency options to add to your reference library, A Currency Options Primer is an excellent choice to consider.

Direct link to this book at Amazon