For whom it is intended:
- Particularly for legal entities
Definition:
Currency barrier options are transactions wherein the seller provides to the buyer the right, but not the obligation, to buy (call option) or to sell (put option) a specified quantity of one currency against payment of an agreed quantity in another currency with settlement at an established future date. However, the option is exercised only if the option is activated (knock-in) or not deactivated (knock-out). The buyer of the option pays the option premium to obtain this right.
- A knock-in barrier option is a currency option whereby the agreed transaction is inactive so long as an agreed barrier price is not reached. If the barrier price is not reached, then the option expires worthless at the expiry date.
- A knock-out barrier option is a currency option whereby the agreed transaction starts out active and if an agreed barrier price is not reached then the option is settled in the standard way. In the opposite case, meaning that the agreed barrier level is reached, then the currency option is deactivated and expires worthless at the expiry date.
- The buyer of a call option obtains a right to buy an agreed amount of a given currency for an agreed strike price at the settlement date.
- The seller of a call option is obliged to sell at the request of the option’s buyer (the buyer’s exercise right) an agreed amount of a given currency for an agreed strike price at the settlement date.
- The buyer of a put option obtains a right to sell an agreed amount of a given currency for an agreed strike price at the settlement date.
- The seller of a put option is obliged to buy at the request of the option’s buyer (the buyer’s exercise right) an agreed amount of a given currency for an agreed strike price at the settlement date.
Advantages of the product:
- The buyer of an option has unlimited possibility to participate in favourable market price development.
- The premium is less costly compared to a regular currency option.
Disadvantages of the product:
- The option’s buyer pays a premium to obtain this possibility
Variations of the product:
- European barrier option – The underlying market price relative to the barrier price only matters on one given date (the expiry date).
- American barrier option – The underlying market price relative to the barrier price is continuously important to the option’s being active regarding the agreed transaction right up to the expiry date.
- Options strategies – These are formed by combining 2 or more currency options or currency barrier options. Their goal is to minimise costs while maintaining the options’ advantages. The client usually buys one or more options and at the same time sells one or more options.
Conditions of concluding a transaction:
- Master Agreement for Financial Transactions
- Limit for treasury operations
- Minimum volume of EUR 100,000
