A number of firms are presently offering options on off-exchange
foreign currency contracts. Buying and selling forex options present
additional risks, many of which are similar to those inherent
in buying options on futures contracts. Therefore, you should
consult NFA’s brochure, Buying Options on Futures Contracts:
A Guide to Uses and Risks, which discusses the mechanics and
risks of options trading.
There are two significant differences between buying off-exchange
forex options and buying options on futures contracts. First, when
you exercise an option on an exchange-traded futures contract, you
receive the underlying exchange-traded futures contract. When
you exercise an off-exchange forex option, you will probably receive
either a cash payment or a position in the underlying currency.
Second, NFA’s options brochure only discusses American-style
options, which can be exercised at any time before they expire.
Many forex options are European-style options, which can be exercised
only on or near the expiration date. You should understand
which type of option you are purchasing.
Some of the common terms used in trading off-exchange foreign
currency options are included in the glossary at the end of
this booklet.
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