Currency Options and Structured Products
Option fundamentals
A currency option gives the buyer the right, but not the obligation, to exchange one currency for another at a specified strike on or before expiry. Calls and puts are defined relative to the base currency in the stated quote. Candidates must understand premium, strike, expiry, exercise style (European versus American), and the standard risk sensitivities: delta (direction and hedge ratio), gamma (change in delta), vega (volatility), theta (time decay), and rho (interest rates).
Volatility and pricing intuition
Option value rises with volatility and time to expiry. Know implied versus realised volatility, the volatility smile and skew, and why OTM strikes trade at different implied volatilities. Understand at-the-money, in-the-money, and out-of-the-money definitions relative to the base currency. Be able to explain a straddle, strangle, risk reversal, and butterfly as building blocks of the volatility surface.
Structured products
Structured products combine a spot or forward with one or more options to tailor payoff, cost, or risk. Examples include participating forwards, range accruals, knock-out and knock-in barriers, and target redemption structures. Candidates must recognise that embedded leverage and barriers can create discontinuous payoffs and that the client may face unlimited or magnified loss.
Traps in questions
Common traps: calling an option a forward (forgetting the right but not obligation); mislabelling a call as bullish on the quote currency rather than the base; assuming a barrier that has been breached still provides protection; and ignoring that selling options creates margin and credit exposure. Also watch for questions implying structured product yields are risk-free.
Rule of thumb
Buying options caps downside at the premium and preserves upside; selling options collects premium but transfers tail risk to the seller.
Worked example
An exporter buys a EUR put / USD call to protect against euro weakness while retaining upside if the euro strengthens. The maximum loss is the premium paid; the maximum gain is theoretically large if EUR rises, minus the premium.