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Explain how the foreign currency options are traded?

Explain how the foreign currency options are traded?

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Foreign currency options are quoted as number of foreign currencies a domestic currency can buy. A foreign currency option quote will have an agrred upon price at which the currencies shall be exchanged at a future date. The U.S. dollar is the benchmark against which the value of all other currencies is measured. At any point of time a US dollar shall be able to buy more or less of that currency. Fureign currency options in US are traded on Philadelphia Stock Exchange or “PHLX” which is a part of NASDAQ. This exchange sets the exchange rate or strike price, expiration date and the amount of currency to be traded.

An individual or business can also enter forward option as per his liking. However there is a risk of default from the counterparty. In case of futures traded on an exchange there is negligible default chances.

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