Generally speaking, the price of foreign exchange options is influenced by the following factors: the underlying asset price (namely exchange rate), exercise price, expiration time, risk-free interest rate and volatility. When other factors remain unchanged, if the forward exchange rate changes, then the option price will also be affected. ?
The specific impacts are as follows:
Forward exchange rate and exercise price: when buying a call option, if the forward exchange rate is higher than the exercise price, the price of the call option will rise; On the contrary, if the forward exchange rate is lower than the exercise price, the price of the call option will decrease. When buying a put option, contrary to a call option, when the forward exchange rate is higher than the exercise price, the price of the put option will decrease; When the forward exchange rate is lower than the exercise price, the price of put options will rise.
Forward exchange rate and expiration time: When the forward exchange rate changes, the option price will also be affected by the expiration time. If there is a big gap between the forward exchange rate and the current exchange rate, the longer the expiration time, the greater the change of option price.
Forward exchange rate and volatility: If the volatility of forward exchange rate becomes larger, the option price will change accordingly, because this will increase the uncertainty and risk of option price.
To sum up, the forward exchange rate has an important influence on the price of foreign exchange options. When investors trade foreign exchange options, they need to adjust their trading strategies in time according to the change of forward exchange rate in order to obtain the maximum income.