The FX options market began as an over-the-counter (OTC) derivative for the banking and financial sector. In fact, the then new product of currency options offered many advantages. For instance, the leading institutions could hedge against FX market exposure with appropriate derivatives for the first time. In this period, large banks dominated in trading of FX derivates.
Therefore, the Forex options market was widely considered a sole “interbank” market for two or three decades. Most of the trades happened by telephone. Nowadays, things are less complicated thanks to the progress in technology and the Internet. Therefore, even At-Home-Traders may participate in the FX options market.
Today, the foreign exchange options market consists of a constantly increasing number of corporations and individual traders. Their main objectives are speculation and hedging exposure to other currency positions. The preferred medium of choice are online trading platforms. As a result, traders can access options easily. Thus, with more flexibility and faster access to the global markets, everyone can participate in the currency options markets.
Size of the FX Options Market
The FX options market is the market with the highest depth and liquidity in the World of finance. Most trades happen over the counter (OTC) and are softly regulated. On the other hand, there are exchanges which offer foreign exchanges option markets too, for instance the Chicago Mercantile Exchange (CME).
The OTC FX Options Market
The OTC market for FX options is a market between financial institutions and their respective clients. Trades happen on electronic dealing systems or by phone. The issuing institutions are mainly large banks and brokers. They operate dealing desks and act as market makers. Typical clients include:
- Corporations that hedge market exposure.
- Hedge funds that take speculative positions.
Furthermore, FX option brokers estimate the implied volatility and other price-influencing parameters to offer efficient quotes on their markets. The fairness of the pricing model behind the currency options quotes is decisive for the acceptance and success of the market. Once a buyer and a seller agree upon the offered conditions, the broker and his system or desk organises the rest to close the deal between the two parties.
Other markets: Currency Options on exchanges or broker platforms
If you don’t want to trade in the OTC market or your account is too small, there are other channels for the retail trader.
If you prefer absolute transparency behind the pricing of derivatives, then there are currency option exchanges. Different exchanges offer liquid markets to forex option traders too. One of them is the Philadelphia Stock Exchange. They have standardised forex option contracts with quaterly expiries.
Additionally, there are many online forex brokers that advertise their own markets for currency options. Some brokers offer classic FX options to retail traders. Others provide exotic FX options such as binary options.