Forex Investment and Currency Trading

Underlying assets
Underlying assts or instruments include, in particular, shares, bonds, currencies, commodities and indices.

Strike price
The strike price is the price, fixed in advance, at which you can buy or sell the underlying asset when exercising the option right. If the terms and conditions of the issue provide for a cash settlement instead, the strike price serves as a basis for calculating the net amount (if any) which is to be paid to you as holder of the option.

Cash settlement possible instead of delivery
The terms and conditions of the options may provide for a cash settlement, instead of purchase or delivery of the underlying asset, upon exercise of the option right. This generally occurs where a transfer of the underlying asset is not actually possible, e.g. in the case of an index.

With a cash settlement, no actual delivery of the underlying asset takes place when the option is exercised; instead, the difference between the agreed price and the current market value of the underlying asset is determined and paid to the holder of the option as a net amount.

Term
The term or life of a option is the period from its date of issue to the date on which the option right expires. Exchange trading in options and possibility of exercising the option right usually end a few days before the end of the term. Exercising the option right generally requires express notice of exercise. The terms and conditions of the issue may, however, also provide for the option right to be exercised automatically in the event that the options are of value at the end of their term.

Possibility of exercising American-style and European-style options
“American-style” warrants or options mean that you can exercise the option right on any banking day during the term of the warrant. With “European-style” options, this is only possible on the last day of the term. The terms and conditions of the issue may also provide for further restrictions on the exercise of option rights. They may, for example, stipulate that the option right can only be exercised within specific periods during the term or only if a minimum number of options is exercised simultaneously.

Option ratio
The option ratio – often also referred to as the purchase ratio – expresses how many units of the underlying asset you, as holder of the option, can buy (call) or sell (put) by exercising the option. If provision is made for a cash settlement, the option ratio states how many units of the underlying asset are to be taken as the basis for calculating the cash settlement.

How they work

The most important aspects of the way in which options work, especially the motives behind a decision to purchase a call or put option, are explained below.

Leverage effect
As purchaser, you pay a price, determined largely by supply and demand, for the right embodied in the option. The current price of the option is closely related to that of the underlying asset, although the price of the option is generally very low in comparison to that of the underlying asset. Consequently, any change in the price of the underlying asset generally triggers a change in the price of the option which is greater in percentage terms (the “leverage effect”). In other words, as holder of a option you participate to an above-average extent in both rises and falls in the price of an underlying asset.

Different expectations
Buyers of call options and buyers of put options have different expectations about the direction in which the price of the underlying asset is going to move. Normally, the following relationships exist:

• Purchase of a call option: Expectation that prices will rise
  The buyer of a call option expects that the price of the underlying asset will rise during the term of the option. If this occurs, the option right generally increases in value. The buyer of the call option hopes that this increase in value will be reflected in a higher price for this option.
• Purchase of a put option: Expectation that prices will fall
  The buyer of a put option expects that the price of the underlying asset will fall during the term of the option. If this occurs, the option right generally increases in value. The buyer of the put option hopes that this increase in value will be reflected in a higher price for his option.

The buyer of a put option is, as a rule, less interested in exercising his option right (and thereby acquiring or disposing of the underlying asset) than in being able to resell the option during its term at a higher price and thus make a profit.