Where to Hedge

If you are seeking to protect your company’s or your personal foreign exchange exposure using currency options, then your local bank’s Treasury department should have the ability to offer you customized Over-The-Counter (OTC) currency options. These options can be tailored to more precisely fit your currency exposure, and they can even include exotic options contracts with unique payoff profiles like knock-out and average rate options. Nevertheless, such counterparties generally have minimum deal sizes that are usually over USD 200,000 in face value.

Some hedgers are concerned that they may not be getting market pricing on OTC options from their banking counterparties. One way to check the pricing you receive in the OTC option market is to ask the bank how they arrived at the price they quoted you for an option. It is made up of the spot rate, strike price, forward points, direction (i.e. whether it’s a call or put, and on which currency), type (i.e. European or American-style) and implied volatility. If you have access to screens that display the current market for these option pricing variables, then you can use the option pricing calculator on this website to check the price you are quoted for European-style forex options.

As an alternative, especially if you need a smaller face amount or if you want to make sure that you are getting a market price and you are able to use a standardized contract for hedging, you can transact currency options using U.S. exchanges such as the Chicago IMM and the Philadelphia Stock Exchange.

To transact these exchange-traded options, you will first need to set up a relationship with a brokerage company that can execute the option trades for you on the exchange. You will then need to select a currency pair, contract month, and strike price from among the series that are available, and figure out how to place an order. As always, be sure to use a counterparty that has a good reputation in the market for fairness, reliability and good price executions.

Contact us now to speak with one of our accredited dealers and discuss your FX options needs.

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