Currency Options

• Right to purchase (call option) or sell (put option) specific amount in one currency for another currency, at an agreed price (strike price) and date (expiration date)
• Intended for individuals and legal entities (binary options solely for legal entities) – both Czech and foreign residents
• Options are available for all currencies listed in the currency table of Komerční banka
• Call option buyer has a right – not an obligation – to purchase certain instruments as of the expiration date. The option seller is then required to sell such instruments to the buyer – as of the expiration date + 2 business days
• Put option buyer has a right – not an obligation – to sell certain instruments as of the expiration date. The option seller is then required to buy such instruments to the buyer – as of the expiration date + 2 business days
• Option buyer pays option premium to the seller

Standard Currency Option

American Currency Option 

• Unlike the standard (European) currency option, it may be partially exercised by the buyer – at any time between the initial date and the expiration date

Binary Currency Option

• Binary option buyer invests an amount X (premium), expecting to receive a higher amount Y (nominal amount), provided specific terms and conditions relating to the development of the reference exchange rate are met
• Such terms and conditions may be defined as follows:

• Reference exchange rate reaches a defined upper (applies to binary Up option) or lower (applies to binary Down option) limit (strike) – this applies to In options
• Reference exchange rate does not reach a defined upper (applies to binary Up option) or lower (applies to binary Down option) limit (strike) – this applies to Out options
• Reference exchange rate reaches a defined upper or lower limit – this applies to Double In options
• Reference exchange rate does not reach a defined upper or lower limit – this applies to Double Out options

Barrier Currency Options

• Buyer is exposed to some risk – arising from the nature of Barrier Currency Options  
• Barrier refers to an exchange rate, at which the option is either activated (knock in) or expires (knock out)
• Barrier Currency Option types can be either “knock–in” or “knock–out”

• Knock-in options are the same as standard currency options, if they are activated during their existence
• Knock-out options are the same as standard currency options, provided they are not deactivated during their existence   

• Profit or loss from FX (currency) transactions is affected by fluctuations in foreign exchange rates
• Maximum loss for the option buyer is limited to the paid premium
• Risk associated with sold options is much higher that with purchased options (loss of the option seller may significantly exceed the received premium)
• Option seller commits to purchase or sell underlying instruments
• In case an option is exercised, the option seller is in a situation, where the current market price of underlying assets sold by the seller may be significantly higher than the strike price or, conversely, the current market price of underlying assets purchased by the seller may be considerably lower than the strike price (to which the seller committed)
• Barrier option buyer assumes a risk that the option purchased by the buyer might expire prior to expiration date (knock-out option) or may not be activated at all (knock-in option)

• Profit or loss from FX (currency) transactions is affected by fluctuations in foreign exchange rates
• Maximum loss for the option buyer is limited to the paid premium
• Risk associated with sold options is much higher that with purchased options (loss of the option seller may significantly exceed the received premium)
• Option seller commits to purchase or sell underlying instruments
• In case an option is exercised, the option seller is in a situation, where the current market price of underlying assets sold by the seller may be significantly higher than the strike price or, conversely, the current market price of underlying assets purchased by the seller may be considerably lower than the strike price (to which the seller committed)
• Barrier option buyer assumes a risk that the option purchased by the buyer might expire prior to expiration date (knock-out option) or may not be activated at all (knock-in option)

Example of risk

Below is an example of risk associated with a Call option

• Client purchases a currency option from the bank that gives him the right to purchase EUR 1 million/sell CZK, with expiration date in 1 month
• Agreed exchange rate (strike price): 27.565; the client pays option premium of EUR 4,300 to the bank
  • On the expiration date, the current spot exchange rate is 26.565
  • The client does not exercise the option – the client’s loss on the transaction is limited to the paid premium of EUR 4,300

Below is an example of risk associated with a Put option

• Client sells a currency option to the bank that gives him the right to sell EUR 1 million/purchase CZK, with expiration date in 1 month
• Agreed exchange rate (strike price): 27.565; the bank pays option premium of EUR 4,100 to the client
  • On the expiration date, the current spot exchange rate is 26.565
  • The bank exercises the option – although the client received a premium of EUR 4,100 from the bank, the client’s loss of CZK 1 million significantly exceeds the premium amount