FX Options
FX Option Exercise
FX Options expire on the Saturday following the third Friday of the month. On the expiration date, the call buyer can exercise his or her right to buy the underlying foreign currency at the FX option's strike price, and a put holder can exercise his or her right to sell the underlying foreign currency spot position at the FX option's strike price. Most foreign currency options are not exercised by the buyer, but instead are offset in the market before expiration.
When expiration occurs, one of two things can happen to the FX option:
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If the FX option is “in the money”, meaning the strike price is lower than the current exchange rate (in the case of calls) or higher than the current exchange rate (in the case of puts), the option will be exercised in cash, which will be deposited into the investor’s account on the next business day. The amount of cash will be the dollar difference between the settlement value and the strike price of the contract, multiplied by 100. Generally, the settlement value of the FX option is based on the 12:00 Noon (Eastern Time) Buying Rate, as determined by the Federal Reserve Bank of New York on the last trading day prior to expiration (usually a Friday).
Please note the FX Options are exercised European Style, meaning they can only be exercised on the expiration date. Therefore, there is no fear for early exercise by other option holders. - If the FX Option is “out of the money”, meaning the strike price is higher than the current exchange rate (in the case of calls) or lower than the current exchange rate (in the case of puts), the option will expire worthless. The investor would forego the original capital he paid to buy the contracts initially.