Currency Options Intrinsic Value

A currency option is said to have “intrinsic value” when the strike price of the option is more favourable to execute at than the prevailing market price of the underlying contract. The greater the intrinsic value of an option, the higher its premium will be. Some important forex option terms that relate to an option’s intrinsic value are:

  • An option with some intrinsic value is described as being "In-The-Money" or ITM.
  • An option with no intrinsic value is said to be "Out-of-The-Money" or OTM.
  • When the strike price of the forex option is equal to the prevailing price of the underlying (usually the current forward rate for the delivery date of European-style options) the option is said to be "At-The-Money" or ATM.

In currency options, intrinsic value is determined by first assessing whether a positive difference exists between the strike price of the option and the current price of the underlying foreign exchange contract that has the same delivery date as the forex option. If the strike price is out-of-the-money (worse than) or at-the-money (equal to) the rate of the underlying forex spot, forward or futures contract, then the forex option has no intrinsic value. Alternatively if the strike price is in-the-money (better than) the prevailing rate of the underlying, then the option has intrinsic value equal to the positive difference between the option’s strike price and the underlying’s price.

Furthermore, the underlying instrument involved in currency options can differ depending on what market and style of forex option you are considering. For example, American-style OTC currency options calculate their intrinsic value relative to the spot rate, since they can be exercised for a spot contract at any time the holder wishes, up to and including the expiration date. Nevertheless, in practice, American-style options are usually only exercised early when the time value of the option is close to or equal to zero. If an American-style option still has remaining time value, it is usually preferable to sell it back to the market to close out the position, rather than exercising it early and wasting the time value.

On the other hand, the intrinsic value of European-style OTC currency options is calculated relative to the forward foreign exchange rate prevailing for the delivery date of the option since they cannot be exercised before their expiration date.

In addition, both American style and European Style currency options that have a futures contract as their underlying instrument are commonly traded on exchanges. These options both calculate their intrinsic value relative to the prevailing price of the underlying futures contract that delivers on the final settlement date. Again, American-style exchange-traded forex options that have time value are usually closed out via the exchange rather than exercised early in order to recover the remaining time premium.

Make an enquiry
* Denotes a mandatory field.
(Country code/Area code/Number)

Currency Converter

Rate: 0.9865
=
Rate: 1.0137
=
Go
See My FX Dashboard for more info

Register Free

Registration is quick and easy. Access live customer rates, free tools and make international payments.

Register today
Already registered? Login
Get our free commentary
Stay on top of the news with updates from our expert dealers on the latest currency movements. You can unsubscribe any time and your email address is safe – see our >Privacy Policy.


Keep me up to date:
Get free rate alerts
Choose ccy pair and enter the exchange rate. An alert will be triggered when the exchange rate is reached and an email will be sent to you. You can unsubscribe any time and your email address is safe – see our Privacy Policy.
select
/
 


Mobile Forex trading tools

Make money transfers or currency conversions on the go via our mobile site, iPhone or Android apps. Learn more here

Banners

Sitemap

You're in good hands:

  • TRUSTe online privacy certification
  • CanadianForex is registered with
    FINTRAC (Registration no. M08560392)

© 2011 Copyright CanadianForex Limited

The CanadianForex service is owned and provided by CanadianForex Limited [CN: 674939-9] ("CanadianForex"). Any reference on this page to "we", "us", or "our" is a reference to CanadianForex.

CanadianForex is part of the global OzForex Group and is a wholly owned subsidiary of OzForex Pty Ltd (ACN: 092 375 703), an Australian company, whose shareholders include Accel Partners and the Carlyle Group in the US, and Macquarie Bank in Australia.
 
Where any information is provided by CanadianForex, it is done so without considering the investment objectives, financial situation and particular needs of any person. Before acting on any general advice, you should consider its appropriateness to your circumstances. To the extent permitted by law, CanadianForex makes no warranty as to the accuracy or suitability of any information and accepts no responsibility for errors or misstatements, negligent or otherwise. Any quotes given are indicative only. The information may be based on assumptions or market conditions and may change without notice. No part of the information is to be construed as a solicitation to make a financial investment.

DISCLAIMER: CanadianForex makes no warranty, express or implied, concerning the suitability, completeness, quality or exactness of the information and models provided in this web site. Read full disclaimer.

CanadianForex provides international money transfer services to private clients and business customers. Use our free currency converter, exchange rate charts, economic calendar, in-depth currency news and updates and benefit from competitive exchange rates and outstanding customer service.