Option Premium
The upfront price paid to buy an FX option. It depends on how volatile the currency pair is, how long the option runs and the rate (strike) you choose. It is the most you can lose on the option itself.
Related terms
FX Option
The right, but not the obligation, to buy or sell currency at a specified rate (the strike price) on or before a specific date. Options provide flexibility in currency hedging strategies.
Read full definitionVolatility
The degree of price fluctuation in a currency over a specific period. Higher volatility means larger price swings and greater uncertainty in exchange rates, making it a key measure of FX market risk.
Read full definitionHedging
Taking an offsetting position to reduce the impact of currency or price movements on a business. The aim is to protect margins and make cash flows more predictable, not to speculate.
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Forward Points
The amount added to or subtracted from the spot rate to price a forward contract. They reflect the interest-rate difference between the two currencies over the contract period.
Read full definitionOptions Collar
A hedging strategy that combines buying a protective option and selling another to offset the cost. It caps downside risk within a defined range while keeping some upside, often at little or no premium.
Read full definitionNatural Hedge
Reducing currency risk by matching revenues and costs in the same currency, so gains and losses offset without a financial instrument, for example, paying suppliers in the currency you also earn.
Read full definitionFX Exposure
The degree to which a business’s financial results are affected by exchange-rate movements. It arises from foreign-currency sales, purchases, assets, liabilities or forecast cash flows.
Read full definitionMark-to-Market
Revaluing an open position at the current market rate to show its present gain or loss. Hedges are marked to market so a business can see the live value of its contracts.
Read full definitionMargin Call
A request for additional funds when an open hedging position moves against you and its mark-to-market loss exceeds the collateral already posted. It restores the required security buffer.
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