Key product features
Participate in favourable exchange rate moves up to the cap level.
Cheaper than the equivalent Vanilla.
Upfront premium.
Limited upside/downside.
Product description/scenario
A Spread is a modification of the Vanilla, where the purchaser of the Spread buys a Vanilla Option at one strike, and sells another Vanilla Option that is further Out-The-Money than the first. This puts a cap on the upside of the purchased option.
The holder of the Spread is able to capture all profits in excess of the premium up to the strike of the sold option.
Spreads can facilitate both bullish (Call Spread) and bearish (Put Spread) views.
Example trade profile
Payout profile at expiry
Payoff description
If spot at expiry is:
At or below the strike (1.3000), the client is free to trade at the prevailing market rate.
In between the strike (1.3000) and the cap (1.4000), the client purchases EUR at 1.3000.
At or above the cap (1.4000) the client can transact at a rate effectively 10 cents lower than spot, thereby realizing the maximum profit of this trade.
Variations
Calendar Spread:
Two Call Options (or two Put Options) with different expiry dates.
Diagonal Spread:
Two Call Options (or two Put Options) with different strikes and different expiries.
Forex Product - Spread
Linear Mode
