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Currency Options Pricing Factors- Impact on Options Premium

Published on Friday, August 24, 2018 by Chittorgarh.com Team | Modified on Thursday, November 14, 2019

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A solid understanding of factors influencing currency options pricing is important to help you take advantage of the price movements and maximize your earnings from the trades. Here are 5 key factors that have an impact on the premium of Call and Put Currency Options-

Factors Influencing Currency Option prices

  1. Exchange Rate- The underlying in a Currency Option is the exchange rate of the particular currency. The exchange rate has a direct relationship with the premium pricing of the Call option and inverse relationship with the Put option. Any increase in the exchange rate of the underlying currency pushes up the premium of the Call Option. The increase in the exchange rate of the underlying lowers the premium of the PUT option.
  2. Strike Price- The price of the premium is inversely related to the strike price. So, an increase in the strike price will reduce the premium for a Call option. In the case of Put Option, the premium increases with an increase in strike price.
  3. Interest Rate- The interest rate of the economy has a direct impact on the prices of the Currency Options. As interest rate increases, the cost of investment increases. So, an increase in the interest rate will increase the premium for a Call option. In the case of the Put Option, the premium decreases with an increase in interest rate.
  4. Time to maturity- Call & Put options lose value as the time to maturity decreases. The longer the time for a currency option to expire, the higher is the premium. And it decreases as you come closer to the expiry date of the option.
  5. Volatility- An increase in volatility signals a high degree of uncertainty about the exchange rate of the currency and hence impacts the value of an option. The price of the Call option increases with higher volatility while that of Put option decreases.

Factors Influencing Currency Option prices

Factors

Call Option

Put Option

Increase in Exchange Rate

Increase

Decrease

Increase in Strike Price

Decrease

Increase

Increase in Interest Rate

Increase

Decrease

Decrease in Time to maturity

Decrease

Decrease

Increase in Volatility

Increase

Decrease

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