Foreign currency options

Bank of Melbourne offers competitive Foreign Currency Options pricing for amounts of AUD100,000 and over in all major currencies. A Foreign Currency Option enables you to protect your business from adverse exchange rate fluctuations whilst allowing you to take advantage of any favourable movements. The value of a Foreign Currency Option is in having the right, but not the obligation, to exchange currency on a fixed date.

What is a Foreign Currency Option?

Foreign Currency Options offer a wide range of methods for limiting the risks associated with foreign exchange exposure. Option holders can obtain 'Insurance' against adverse movements in exchange rates while maintaining the ability to profit should the exchange rate move favourably.

Definition: A Foreign Currency Option grants a customer the right, but not the obligation, to buy or sell foreign currency at a specified price within a specified period of time (American Option) or on a fixed date (European Option). The most common Foreign Currency Option is the European style.

The agreed price at which the exchange of currencies may occur is called the exercise or strike price. The date on which the option expires is called the expiry date.

The buyer of the option pays a premium. Upon payment of the premium the option buyer has no further obligation in the contract, but has the right to exchange currencies at the agreed Strike Price.

Foreign Currency Options within Australia would normally involve conversion from or to Australian Dollars. As such, the Australian Dollar is the underlying currency.

If you are an importer, you would have a need to SELL Australian Dollars (purchase a PUT option).

If you are an exporter, you would have a need to BUY Australian Dollars (purchase a CALL option).

Upon expiry of the option, if the strike price is 'Out of the Money' (i.e. it is more favourable to convert at the prevailing market exchange rate) you would allow your option to lapse. Consequently, the maximum cost of the option is the premium paid and the associated funding cost for this premium. The conversion at the more favourable exchange rate on the expiry date effectively reduces the 'cost' of the option.

If the option is 'In the Money' it is likely you will exercise your right to exchange currencies under the option.

Unlike a Forward Exchange Contract, where each party is always obliged to execute, an option contract enables you to take advantage of favourable exchange rate movements, by enabling you to buy/sell the currency at the prevailing rate of exchange rather than the strike price of the option.

Need more information?

If you have any questions or want more information, call us toll free on 1800 221 815.

Read the Product Disclosure Statement.