Series 7: 5.5.2.2. The Forex Options Market

5.5.2.2. The Forex Options Market

Most foreign currency options are written over the counter in the interbank market. The interbank market is a wholesale market composed of a small group of large international banks and international corporations. It has no central location. Exchange rates are established by the purchase and sale of currencies at the trading desks of these institutions or through electronic brokerage platforms. Banks will take positions for their own accounts and act as brokers for other banks and commercial customers. Options are not standardized but negotiated by the parties.

While the interbank market dominates the foreign exchange options market, standardized options listed on an exchange also play a significant role. The Philadelphia Stock Exchange and the Chicago Mercantile Exchange Group, for example, offer foreign currency options. While the OTC market is unregulated, the SEC and Commodities Futures Trading Commission regulate the exchanges. The Options Clearing Corporation issues and guarantees exchange-traded foreign currency options.

The following are some of the important characteristics of the exchange-trade