Currency Options

Continued from the previous chapter on currency futures, this chapter introduces options, arguably the most innovative, complicated and publicised class of derivative instruments ever developed, with a focus on currency options. Options can be traded on OTC markets and organised exchanges. Options are not as straightforward as forwards and futures and, consequently, option pricing is much more complicated than the pricing of a forward product or futures product and warrants more discussion. Therefore, this chapter also devotes one section to the risk neutral valuation principle in options pricing in particular and in derivatives pricing in general, which covers the binomial tree method and the Black-Scholes model.