Thursday, February 12, 2009

FX option - collateral, briefly

A 2008 CFA textbook suggests that most fx options are tailor-made for a given client. Listed fx options trade volume is "fairly low" (2008)

According to Wikipedia, Most of the FX option volume is traded OTC , but a fraction is traded on exchanges like the International Securities Exchange (FX options), Philadelphia Stock Exchange (FX options), or the Chicago Mercantile Exchange (options on FX futures)

I guess one possible reason is - end users (large international organizations who need to convert currencies) don't like the standardized terms on the exchanges??

Another possible reason is fee??

Most forex option trading is conducted via telephone. There are only a few forex brokers offering online forex option trading platforms.

The same fx option can be viewed as either a call or a put, but the writer is always the writer. Fx option writer (say DB) must put up collateral; fx option buyer must pay the writer an upfront premium. Intuitive for a fx call, but if you see it as a put, the same writer (DB) still has the same collateral/premium deal.

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