26
Oct

Vanilla Options

The most basic option that gives you the right, but not the obligation, to exchange currency at a specified rate at a known date in the future.

A vanilla option can add a layer of diversity to your trading, and a safety net for your hedging strategy. It is regarded to be the most basic of all the options (hence the name!)

Used by both individuals and companies, a vanilla option gives the holder the right (but not the obligation) to exchange one currency for another at a specified rate (known as the ‘strike rate’), at a specified point in time (the ‘expiry’). When dealing in volatile currencies, or in times when global trade and politics are somewhat unpredictable, this option provides a level of assurance when it comes to FX hedging for your business.  

When might a vanilla option be used?

A vanilla option might be used to protect you or your business against the possibility of a currency falling (known as a ‘put’), or to allow you to benefit from the possibility of a currency rising (known as a ‘call’). 

As you have no obligation to make the exchange, if the market goes in your favour, you retain the option to deal at the (favourable) spot rate. If, however, the market moves against you, your contract is in place and will be honoured if you choose to buy at your pre-agreed ‘strike rate’. Think of it as a kind of foreign exchange insurance policy! 

How much does a vanilla option cost?

Of course, like any good insurance policy, vanilla options aren’t free. The cost (known as the ‘premium’) varies entirely based on how long you want to hold the option for, the strike rate of the option, and the volatility of the currency you wish to exchange. Our Currency Hedger experts will be able to help you identify the costs associated with a vanilla option for your business.

With a Currency Hedger business account, you’ll enjoy access to a wide range of FX options to help you manage your foreign exchange risk. These include vanilla options as well as collar options and other cost-free options. Our dedicated currency specialists can talk you through these tools and tailor a solution that fits the requirements of your business.

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