Fx digital option collar

The new Firefox. Download Firefox — English (US) Your system may not meet the requirements for Firefox, but you can try one of these versions: Download Firefox — English (US) Your system doesn't meet the requirements to run Firefox. Your system doesn't meet the requirements to run Firefox. Please follow these instructions to install Firefox. Please follow these instructions to install Firefox. The best Firefox ever. Uses 30% less memory than Chrome. Truly Private Browsing with Tracking Protection. all things Firefox. If you haven’t previously confirmed a subscription to a Mozilla-related newsletter you may have to do so. Please check your inbox or your spam filter for an email from us. Advanced Install Options & Other Platforms. Download Firefox for Windows. Download Firefox for macOS.

Download Firefox for Linux. Download Firefox — English (US) Your system may not meet the requirements for Firefox, but you can try one of these versions: Download Firefox — English (US) Your system doesn't meet the requirements to run Firefox. Your system doesn't meet the requirements to run Firefox. Please follow these instructions to install Firefox. Digital Option. What is a 'Digital Option' A digital option is an option whose payout is fixed after the underlying stock exceeds the predetermined threshold or strike price. It is also referred to as a "binary" or "all-or-nothing option." A digital option depends only on one proposition, which is whether the underlying asset expires in the money at the expiration date. If the underlying asset expires in the money, the option is automatically exercised. BREAKING DOWN 'Digital Option' The value of the payout is determined at the onset of the contract and doesn't depend on the magnitude by which the price of the underlying moves.

So, whether an investor is in the money by $1 or $5, the amount he receives will be the same. Since digital options are fairly simple to understand, this type of option may be more attractive than plain vanilla European or American options. Costless Collar (Zero-Cost Collar) The costless collar, or zero-cost collar, is established by buying a protective put while writing an out-of-the-money covered call with a strike price at which the premium received is equal to the premium of the protective put purchased. Sell 1 OTM LEAPS Call. Buy 1 ATM LEAPS Put. Costless collars can be established to fully protect existing long stock positions with little or no cost since the premium paid for the protective puts is offset by the premiums received for writing the covered calls. Depending on the volatility of the underlying, the call strike can range from 30% to 70% out of money, enabling the writer of the call to still enjoy a limited profit should the stock price head north. This method is typically executed using LEAPS® options as the striking price of the call sold can be rather high in relation to the price of the underlying stock. Limited Profit Potential. Profit is limited by the sale of the LEAPS® call. Maximum profit is attained when the price of the underlying asset rallies above or equal to the strike price of the short call.

The formula for calculating maximum profit is given below: Max Profit = Strike Price of Short Call - Purchase Price of Underlying - Commissions Paid Max Profit Achieved When Price of Underlying >= Strike Price of Short Call. Suppose the stock XYZ is currently trading at $50 in June '06. An options trader holding on to 100 shares of XYZ wishes to protect his shares should the stock price take a dive. At the same time, he wants to hang on to the shares as he feels that they will appreciate in the next 6 to 12 months. He setups a costless collar by writing a one year JUL '07 60 LEAPS call for $5 while simultaneously using the proceeds from the call sale to buy a one year JUL '07 50 LEAPS put for $5. If the stock price rally to $70 at expiration date, his maximum profit is capped as he is obliged to sell his shares at the strike price of $60. At 100 shares, his profit is $1000. On the other hand, should the stock price plunge to $40 instead, his loss is zero since the protective put allows him to still sell his shares at $50. However, should the stock price remain unchanged at $50, while his net loss is still zero, he would have 'lost' one year's worth of premiums of $500 that would have been collected if not for the protective put purchase. Note: While we have covered the use of this method with reference to stock options, the costless collar is equally applicable using ETF options, index options as well as options on futures. For ease of understanding, the calculations depicted in the above examples did not take into account commission charges as they are relatively small amounts (typically around $10 to $20) and varies across option brokerages. However, for active traders, commissions can eat up a sizable portion of their profits in the long run. If you trade options actively, it is wise to look for a low commissions broker. Traders who trade large number of contracts in each trade should check out OptionsHouse.

com as they offer a low fee of only $0.15 per contract (+$4.95 per trade). By setting up the costless collar, a long term stockholder forgoes any profit should the stock price appreciates beyond the striking price of the call written. In return, however, maximum downside protection is assured. As such, it is a good options method to use especially for retirement accounts where capital preservation is paramount. Many senior executives at publicly traded companies who have large positions in their company's stock utilize costless collars as a way to protect their personal wealth. By using the zero-cost collar method, an executive can insure the value of hisher stock for years without having to pay high premiums for the insurance of the put. The following strategies are similar to the costless collar in that they are also bullish strategies that have limited profit potential and limited risk. Continue Reading. Buying Straddles into Earnings. Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. Read on. Writing Puts to Purchase Stocks.

If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. Read on. What are Binary Options and How to Trade Them? Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. Read on. Investing in Growth Stocks using LEAPS® options. If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPS® and why I consider them to be a great option for investing in the next Microsoft®. Read on. Effect of Dividends on Option Pricing. Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. Read on. Bull Call Spread: An Alternative to the Covered Call. As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call method, the alternative. Read on. Dividend Capture using Covered Calls. Some stocks pay generous dividends every quarter.

You qualify for the dividend if you are holding on the shares before the ex-dividend date. Read on. Leverage using Calls, Not Margin Calls. To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. Read on. Day Trading using Options. Day trading options can be a successful, profitable method but there are a couple of things you need to know before you use start using options for day trading. Read on. What is the Put Call Ratio and How to Use It. Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. Read on. Understanding Put-Call Parity. Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. Read on. Understanding the Greeks. In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions.

They are known as "the greeks". Read on. Valuing Common Stock using Discounted Cash Flow Analysis. Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. Read on. Follow Us on Facebook to Get Daily Strategies & Tips! Options Strategies. Options method Finder. Risk Warning: Stocks, futures and binary options trading discussed on this website can be considered High-Risk Trading Operations and their execution can be very risky and may result in significant losses or even in a total loss of all funds on your account. You should not risk more than you afford to lose. Before deciding to trade, you need to ensure that you understand the risks involved taking into account your investment objectives and level of experience. Information on this website is provided strictly for informational and educational purposes only and is not intended as a trading recommendation service. TheOptionsGuide. com shall not be liable for any errors, omissions, or delays in the content, or for any actions taken in reliance thereon.

The financial products offered by the company carry a high level of risk and can result in the loss of all your funds. You should never invest money that you cannot afford to lose. The Collar method. A collar is an options trading method that is constructed by holding shares of the underlying stock while simultaneously buying protective puts and selling call options against that holding. The puts and the calls are both out-of-the-money options having the same expiration month and must be equal in number of contracts. Sell 1 OTM Call. Technically, the collar method is the equivalent of a out-of-the-money covered call method with the purchase of an additional protective put. The collar is a good method to use if the options trader is writing covered calls to earn premiums but wish to protect himself from an unexpected sharp drop in the price of the underlying security. Limited Profit Potential. The formula for calculating maximum profit is given below: Max Profit = Strike Price of Short Call - Purchase Price of Underlying + Net Premium Received - Commissions Paid Max Profit Achieved When Price of Underlying >= Strike Price of Short Call. The formula for calculating maximum loss is given below: Max Loss = Purchase Price of Underlying - Strike Price of Long Put - Net Premium Received + Commissions Paid Max Loss Occurs When Price of Underlying The Options Guide.

Options Strategies. Options method Finder. Risk Warning: Stocks, futures and binary options trading discussed on this website can be considered High-Risk Trading Operations and their execution can be very risky and may result in significant losses or even in a total loss of all funds on your account. You should not risk more than you afford to lose. Before deciding to trade, you need to ensure that you understand the risks involved taking into account your investment objectives and level of experience. Information on this website is provided strictly for informational and educational purposes only and is not intended as a trading recommendation service. TheOptionsGuide. com shall not be liable for any errors, omissions, or delays in the content, or for any actions taken in reliance thereon. The financial products offered by the company carry a high level of risk and can result in the loss of all your funds. You should never invest money that you cannot afford to lose. Fx digital option collar Barrier Options - These are options that have an embedded price level, (barrier), which if reached will either create a vanilla option or eliminate the existance of a vanilla option.

These are referred to as knock-insouts which are further explained below. The existance of predetermined price barriers in an option make the probability of pay off all the more difficult. Thus the reason a buyer purchases a barrier option is for the decreased cost and therefore increased leverage. Basket Options - This type of option allows the buyer to combine two or more currencies and to assign a weight to each currency. The payoff is determined by the difference between a predetermined strike price and the combined weighted level of the basket of currencies chosen at the outset. The USDX futures contract can be considered as a basket of currencies, with each currency assigned a particular weight. In the otc market, however, the buyer chooses the currencies and the weight distribution. Bermuda Options - This is a type of option that is exercisable only on predetermined dates, such as every month, or every quarter. They are neither american style or european style, hence the term, "bermuda". Chooser Options - Allows the buyer to determine the characteristics of an option during a predetermined set time span. As an example, during a 30 day period, the buyer can determine if the option will be a put or call, what the strike price will be, and at times even set the expiry date. After the 30 day period has elapsed, the seller must enter into an option agreement with the buyer according to the terms chosen by him. This type of option is generally quite expensive because of the flexibility afforded to the buyer. Compound Options - This is simply an option on an existing option.

Deferred Payment Options - This type of option is simply an american style vanilla option with a "twist". The buyer may exercise at any time, however, payment is deferred until the original expiry date. This type of option is less expensive than your standard american style vanilla option. It is also a longer term option with expiry dates normally not less than a year out. Digital Options - These are options that can be structured as a "one touch" barrier, "double no touch" barrier and "all or nothing" callputs. The "one touch" digital provides an immediate payoff if the currency hits your selected price barrier chosen at outset. The "double no touch" provides a payoff upon expiration if the currency does not touch both the upper and lower price barriers selected at the outset. The callput "all or nothing" digital option provides a payoff upon expiration if your option finishes in the money. It is referred to as "all or nothing" because even if your option finishes in the money by 1 pip, you receive the full payoff. Digital options are usually settled in cash. Dual-Factor Barrier Options - This currency option has a predetermined barrier set in a different underlying market.

If the barrier is hit then a payoff andor knock-outin is triggered. It is often used in hedging commodity price movements. Exotic Options - This is a term used to categorize options that are not vanilla options, but rather those very options listed here. There are many other variations of exotic options than those listed in this glossary, with more being invented all of the time. This list, however, does cover the more common exotic options. Knockin Options - There are two kinds of knock-in options, i) up and in, and ii) down and in. With knock-in options, the buyer starts out without a vanilla option. If the buyer has selected an upper price barrier, and the currency hits that level, it creates a vanilla option with a maturity date and strike price agreed upon at the outset. This would be called an up and in. The down and in option is the same as the up and in, except the currency has to reach a lower barrier. Upon hitting the chosen lower price level, it creates a vanilla option. Knock-insouts usually call for delivery of the underlying asset, unlike digitals which are settled in cash. Knockout Options - These options are the reverse of knock-ins. With knock-outs, the buyer begins with a vanilla option, however, if the predetermined price barrier is hit, the vanilla option is cancelled and the seller has no further obligation. As in the knock-in option, there are two kinds, i) up and out, and ii) down and out.

If the option hits the upper barrier, the option is cancelled and you lose your premium paid, thus, "up and out". If the option hits the lower price barrier, the option is cancelled, thus, "down and out". Ladder Options - This option is similar to the RatchetCliquet option, except that gains are locked in when the asset hits predefined price levels. Once hit, the gain is guaranteed even if the underlying falls back. If other levels are hit, those returns will then be guaranteed at each level. Lookback Options - This type of option affords the buyer the luxury of "looking back" during the life of the option and choosing the price level that would generate the most gain. This would be the lowest purchase price in the case of a call, and the highest sale price in the case of a put. Lookback options come in both american and european excercise. These options are quite expensive, less so for american exercise. OTC Options - What attracts those to the otc market and to the otc options market in particular is the flexibility afforded to the user. In the otc exotic option market, the participant may choose and structure the contract as desired.

For hedgers, this is particularly attractive since the standardized exchange options do not offer much flexibility resulting in imperfect costly hedges. For the speculator too, there are advantages since one may take a position that exactly reflects market opinion, resulting in reduced cost. Rainbow Options - This type of option is a combination of two or more options combined, each with its own distinct strike, maturity, etc. In order to achieve a payoff, all of the options entered into must be correct. An analogy may be a football parlay, whereby one predicts the outcome of three games. In order to win, you must get all three games correct. Ratchet Options - Also known as cliquet, this type of option locks in gains based on a time cycle, such as monthly, quarterly, or semi-annually. This is accomplished by determining the price level of the currency on predetermined anniversay dates. Quanto Options - This is an option designed to eliminate currency risk by effectively hedging it. It involves combining an equity option and incorporating a predetermined fx rate. Example, if the holder has an in-the-money Nikkei index call option upon expiration, the quanto option terms would trigger by converting the yen proceeds into dollars which was specified at the outset in the quanto option contract. The rate is agreed upon at the beginning without the quantity of course, since this is an unknown at the time. This type of arrangement is ideal for international equity managers and mutual funds. Vanilla Options - This is a term used to categorize the basic call and put options with either american or european exercise. It normally refers to the standard options traded on exchanges.

Market Volatility method: Collars. In finance, the term "collar" usually refers to a risk management method called a "protective collar" however, the use of collars for other situations is less publicized. With a little effort and information, traders can use the collar concept to manage risk and, in some cases, increase returns. This article compares protective and bullish collar strategies in terms of how they can help investors manage risk and increase returns. How Protective Collars Work. This method is often used to hedge against the risk of loss on a long stock position or an entire equity portfolio by using index options. It can also be used to hedge interest rate movements by both borrowers and lenders by using caps and floors. Protective collars are considered a bearish to neutral method. The loss in a protective collar is limited, as is the upside. An equity collar is created by selling an equal number of call options and buying the same number of put options on a long stock position. Call options give purchasers the right, but not the obligation, to purchase the stock at the determined price called strike price. Put options give purchasers the right, but not the obligation, to sell the stock at the strike price. The premium, which is the cost of the options from the call sale, is applied toward the put purchase, thus reducing the overall premium paid for the position. Market pundits recommend this method when there is neutrality of the share price following a period when the share price is increasing it is designed to protect profits rather than increase returns.

Collars are an excellent tactic to hedge against risk, but they require a sound understanding of options and how they work in the market. If you need a refresher on how options work, or are looking to learn some options trading strategies, Investopedia Academy's Options for Beginners is the ideal place to start. For example, let's say that Jack purchased 100 shares of XYZ some time ago for $22 per share. Let's also assume that it is July and that XYZ is currently trading at $30. Considering recent market volatility, Jack is uncertain about the future direction of XYZ shares, so we can say that he is neutral to bearish. If he were truly bearish, he would sell his shares to protect his $8share profit but he is not sure, so he is going to hang in there and enter into a collar to hedge his position. The mechanics of this method would be for Jack to purchase one out-of-the-money put contract and sell one out-of-the-money call contract, as each option represents 100 shares of the underlying stock. Jack feels that once November is over there will be less uncertainty in the market, and he would like to collar his position at least through November. Jack finds that XYZ presently has options trading in October and January. To accomplish his objective, Jack decides on a January option collar. He finds that the January $27.50 put option (meaning a put option expires in January with a strike price of $27.50) is trading at $2.95, and the January $35 call option is trading at $2. Jack's transaction is: Buy to open, the opening of the long position, one January $27.50 put option at a cost of $295 (premium of $2.95 * 100 shares) Sell to open, the opening of the short position, one January $35 call option for $200 ( premium of $2 * 100 shares) Jack is out of pocket (or has a net debit of) $95 ($200 - $295 = -$95) It's difficult to pinpoint Jack's exact maximum profit andor loss, as many things could transpire.

Let's look at the three possible outcomes for Jack once January arrives: XYZ is trading at $50 per share: As Jack is short the January $35 call, it is most likely that his shares were called at $35. With the shares currently trading at $50, he has lost $15 per share from the call option he sold, and his out-of-pocket cost, $95, on the collar. We can say that this is a bad situation for Jack's pocket. However, we cannot forget that Jack purchased his original shares at $22, and they were called (sold) at $35, which gives him a capital gain of $13 per share plus any dividends he earned along the way, minus his out-of-pocket costs on the collar. His total profit from the collar is ($35 - $22) * 100 - $95 = $1,205. As opposed to collaring positions individually, some investors look to index options to protect an entire portfolio. When using index options to hedge a portfolio, the numbers work a bit differently but the concept is the same. You are buying the put to protect profits and selling the call to offset the cost of the put. Not so commonly discussed are collars designed to manage the type of interest rate exposure present in adjustable-rate mortgages (ARMs). This situation involves two groups with opposing risks. The lender runs the risk of interest rates declining and causing a drop in profits. The borrower runs the risk of interest rates increasing, which will increase his or her loan payments.

OTC derivative instruments, which resemble calls and puts , are referred to as caps and floors. Interest rate caps are contracts that set an upper limit on the interest a borrower would pay on a floating-rate loan. Interest rate floors are similar to caps in the way that puts compare to calls: they protect the holder from interest rate declines. End users can trade floors and caps to construct a protective collar, which is similar to what Jack did to protect his investment in XYZ. The Bullish Collar at Work. The bullish collar also deserves mention in the collars category. The bullish collar involves the simultaneous purchase of an out-of-the-money call option and sale of an out-of-the-money put option. This is an appropriate method when one is bullish about the stock but expects a moderately lower stock price and wishes to purchase the shares at that lower price. Being long the call protects a trader from missing out on an unexpected increase in the stock price, with the sale of the put offsetting the cost of the call and possibly facilitating a purchase at the desired lower price. If Jack is generally bullish on OPQ shares, which are trading at $20, but thinks the price is a little high, he might enter into a bullish collar by buying the January $27.50 call at 73 cents and selling the January $15 put at $1.04. In this case, he would enjoy $1.04 - 73 cents = 31 cents in his pocket from the difference in the premiums. The possible outcomes at expiration would be: OPQ above $27.50 at expiration : Jack would exercise his call (or sell the call for a profit, if he did not want to take delivery of the actual shares) and his put would expire worthless. OPQ below $15 at expiration : Jack's short put would be exercised by the buyer and the call would expire worthless. He would be required to purchase the OPQ shares at $15. Because of his initial profit, the difference in the call and put premium, his cost per share would actually be $15 - 31 cents = $14.69. OPQ between $15 and $27.50 at expiration : Both of Jack's options would expire worthless. He would get to keep the small profit he made when he entered into the collar, which is 31 cents per share.

In summary, these strategies are only two of many that fall under the heading of collars. As financial creativity increases, so do collar strategies. Other types of collar strategies exist and they vary in difficulty, but the two strategies presented here are a good starting point for any trader who is thinking of diving into the world of collar strategies. US Search Desktop. We appreciate your feedback on how to improve Yahoo Search . This forum is for you to make product suggestions and provide thoughtful feedback. We’re always trying to improve our products and we can use the most popular feedback to make a positive change! If you need assistance of any kind, please visit our community support forum or find self-paced help on our help site. This forum is not monitored for any support-related issues. The Yahoo product feedback forum now requires a valid Yahoo ID and password to participate. You are now required to sign-in using your Yahoo email account in order to provide us with feedback and to submit votes and comments to existing ideas. If you do not have a Yahoo ID or the password to your Yahoo ID, please sign-up for a new account. If you have a valid Yahoo ID and password, follow these steps if you would like to remove your posts, comments, votes, andor profile from the Yahoo product feedback forum.

Vote for an existing idea ( ) or Post a new idea… Stock screener crashes. choice to remove real names and birthdays from account to stop hackers from stealing names. choice to remove real name and real birthdays from list account to stop hackers from Identity theft. I am requesting that you do a manual review of the organic results on "chinook boot dryers" I am requesting that you do a manual review of the organic results on "chinook boot dryers", and many other "boot dryer" and "boot dryers" keywords. First there is not much variety being displayed, since the search results are almost ALL going to websites controlled by the same guy who has built the following websites, and interlinked them together and crowded out all of the other possible search results: + his pages on Amazon (note the seller is SEA Products, which is the same guy who runs all of the above websites. Scott E Allen.) You can verify this by looking at the phone numbers and addresses on the above websites, plus all of the sites look like each other. This seems very spammy and NOT a good representation of Yahoo's stellar results. Also, it sends the signal to others that all you need to do is build out 5-6 ****** websites, link them together and take over the top search results. which isn't fair to other operators or customers trying to find the best products.

Another interesting thing about the results for "chinook boot dryers" is the fact that this guy has the domain chinookbootdryer. com, and that he is NOT the manufacturer of Chinook Boot Dryers but his organic listing is being treated with domain authority as though he was the manufacturer. We spoke to the actual manufacturer and found out that this guy is only one of many of their dealers and does not work for the company or have any affiliation with them in any way. You can verify this by calling the manufacturer yourself. Their number is 203-366-3840. We have researched many other "boot dryer" keyword results and have noted that his websites are ALL dominant and taking up almost all of the page 1 organic search results. We hope you do the right thing and don't reward this behaviour, since the rest of us are trying to stick to Yahoo's guidelines and play by the rules. with one website. Thanks for your consideration and support! I am requesting that you do a manual review of the organic results on "chinook boot dryers", and many other "boot dryer" and "boot dryers" keywords. First there is not much variety being displayed, since the search results are almost ALL going to websites controlled by the same guy who has built the following websites, and interlinked them together and crowded out all of the other possible search results: + his pages on Amazon (note the seller is SEA Products, which is the same guy who runs all of the above websites. Scott… more.

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Thus the reason a buyer purchases a barrier option is for the decreased cost and therefore increased leverage. Basket Options - This type of option allows the buyer to combine two or more currencies and to assign a weight to each currency. The payoff is determined by the difference between a predetermined strike price and the combined weighted level of the basket of currencies chosen at the outset. The USDX futures contract can be considered as a basket of currencies, with each currency assigned a particular weight. In the otc market, however, the buyer chooses the currencies and the weight distribution. Bermuda (Mid-Atlantic) Options - This is a type of option that is exercisable only on predetermined dates, such as every month, or every quarter. They are neither American style nor European style, hence the term, "Bermuda". Chooser Options - Allows the buyer to determine the characteristics of an option during a predetermined set time span. As an example, during a 30 day period, the buyer can determine if the option will be a put or call, what the strike price will be, and at times even set the expiry date. After the 30 day period has elapsed, the seller must enter into an option agreement with the buyer according to the terms chosen by him. This type of option is generally quite expensive because of the flexibility afforded to the buyer. Collapsible Swap - The collapsible swap is simply a combination of a plain vanilla swap with a swaption on that swap. A swaption is an option on the swap.

In this case, the swaption gives us the right but not the obligation to enter into a swap with the same terms except that we will be buying fixed rates and receiving floating rates. The cashflows will offset and the swap will be deemed to be closed out since the swaption is with the same financial institution with whom we have contracted the swap. Compound Options - This is simply an option on an existing option. Deferred Payment Options - This type of option is simply an american style vanilla option with a "twist". The buyer may exercise at any time, however, payment is deferred until the original expiry date. This type of option is less expensive than your standard american style vanilla option. It is also a longer term option with expiry dates normally not less than a year out. Delayed Start Swap Just as its name suggests, the delayed start swap is a regular plain vanilla swap exchanging cash flows in one index against cash flows in another index with the exception that the start date of the swap is not immediate. Digital Options - These are options that can be structured as a "one touch" barrier, "double no touch" barrier and "all or nothing" callputs. The "one touch" digital provides an immediate payoff if the currency hits your selected price barrier chosen at outset. The "double no touch" provides a payoff upon expiration if the currency does not touch both the upper and lower price barriers selected at the outset. The callput "all or nothing" digital option provides a payoff upon expiration if your option finishes in the money. It is referred to as "all or nothing" because even if your option finishes in the money by 1 pip, you receive the full payoff.

Digital options are usually settled in cash. Dual-Factor Barrier Options - This currency option has a predetermined barrier set in a different underlying market. If the barrier is hit then a payoff andor knock-outin is triggered. It is often used in hedging commodity price movements. Exotic Options - This is a term used to categorize options that are not vanilla options, but rather those very options listed here. There are many other variations of exotic options than those listed in this glossary, with more being invented all of the time. This list, however, does cover the more common exotic options. Futures Option : An option giving the buyer to buysell a futures contract at the strike price. Indexed Principal Swap - The indexed principal swap is a variant in which the principal is not fixed for the life of the option but tied to the level of interest rates. Interest-rate cap is an OTC derivative which protects the holder from rises in short-term interest rates by making a payment to the holder when an underlying interest rate (the index or reference interest rate) exceed a specified strike rate (the cap rate). Caps are purchased for a premium, and typically have maturities between 1 and 7 years. They may make payments to the holder on a monthly, quarterly or semiannual basis, with the period generally set equal to the maturity of the index interest rate. Each period, the payment is determined by comparing the current level of the index interest rate with the cap rate.

If the index rate exceeds the cap rate, the payment is based upon the difference between the two rates, the length of the period, and the contract's notional amount. Otherwise, no payment is made for that period. Interest rate floor - an OTC derivative which protects the holder from declines in short-term interest rates by making a payment to the holder when an underlying interest rate (the index or reference interest rate) falls below a specified strike rate (the floor rate). Floors are purchased for a premium, and typically have maturities between 1 and 7 years. They may make payments to the holder on a monthly, quarterly or semiannual basis, with the period generally set equal to the maturity of the index interest rate. Interest Rate Collar - A combination of an interest rate cap and an interest rate floor. The buyer of the collar purchases the cap option to limit the maximum interest rate he will pay and sells the floor option to obtain a premium to pay for the cap. The effect of the combination is to confine interest rate payments to a range bounded by the strike prices of the cap and floor options. Knock in Options - There are two kinds of knock-in options, i) up and in, and ii) down and in. With knock-in options, the buyer starts out without a vanilla option. If the buyer has selected an upper price barrier, and the currency hits that level, it creates a vanilla option with maturity date and strike price agreed upon at the outset. This would be called an up and in. The down and in option is the same as the up and in, except the currency has to reach a lower barrier. Upon hitting the chosen lower price level, it creates a vanilla option.

Knock-insouts usually call for delivery of the underlying asset, unlike digitals, which are settled in cash. Knockout Options - These options are the reverse of knock-ins. With knockouts, the buyer begins with a vanilla option, however, if the predetermined price barrier is hit, the vanilla option is cancelled and the seller has no further obligation. As in the knock-in option, there are two kinds, i) up and out, and ii) down and out. If the option hits the upper barrier, the option is cancelled and you lose your premium paid, thus, "up and out". If the option hits the lower price barrier, the option is cancelled, thus, "down and out". Ladder Options - This option is similar to the RatchetCliquet option, except that gains are locked in when the asset hits predefined price levels. Once hit, the gain is guaranteed even if the underlying falls back. If other levels are hit, those returns will then be guaranteed at each level. Look back Options - This type of option affords the buyer the luxury of "looking back" during the life of the option and choosing the price level that would generate the most gain. This would be the lowest purchase price in the case of a call, and the highest sale price in the case of a put. Look back options come in both American and European exercise. These options are quite expensive, less so for American exercise. OTC Options - What attracts those to the otc market and to the otc options market in particular is the flexibility afforded to the user.

In the otc exotic option market, the participant may choose and structure the contract as desired. For hedgers, this is particularly attractive since the standardized exchange options do not offer much flexibility resulting in imperfect costly hedges. For the speculator too, there are advantages since one may take a position that exactly reflects market opinion, resulting in reduced cost. Rainbow Options - This type of option is a combination of two or more options combined, each with its own distinct strike, maturity, etc. In order to achieve a payoff, all of the options entered into must be correct. An analogy may be a football parlay, whereby one predicts the outcome of three games. In order to win, you must get all three games correct. Russian Option - A look back option without an expiry date. This type of option can have either an American or a Mid-Atlantic settlement. Ratchet Options - Also known as cliquet, this type of option locks in gains based on a time cycle, such as monthly, quarterly, or semi-annually.

This is accomplished by determining the price level of the currency on predetermined anniversary dates. Swaption - An option to enter into an interest rate swap. The contract gives the buyer the option to execute an interest rate swap on a future date, thereby locking in financing costs at a specified fixed rate of interest. The seller of the swaption, usually a commercial or investment bank, assumes the risk of interest rate changes, in exchange for payment of a swap premium. Quanto Options - This is an option designed to eliminate currency risk by effectively hedging it. It involves combining an equity option and incorporating a predetermined fx rate. Example, if the holder has an in-the-money Nikkei index call option upon expiration, the quanto option terms would trigger by converting the yen proceeds into dollars, which was specified at the outset in the quanto option contract. The rate is agreed upon at the beginning without the quantity of course, since this is an unknown at the time. This type of arrangement is ideal for international equity managers and mutual funds. Vanilla Options - This is a term used to categorize the basic call and put options with either American or European exercise. It normally refers to the standard options traded on exchanges. Vanilla Swap � a swap is simply the exchange of one payment stream for another.

The most common swap would be a fixed for floating rate interest swap. With this contract, the interest payments on a floating rate loan would be exchanged for a fixed rate loan. Note that a swap is basically a zero spread collar. Swaps are also traded on commodities, currencies, and equities.