What goes into an option price?
The underlying rate relative to the strike determines whether immediate exercise has economic value. Remaining time gives the exchange rate an opportunity to move. Implied volatility measures the uncertainty priced into options, not a guaranteed future movement. All else equal, more implied volatility generally increases the value of a conventional call or put.
Currency options also involve two interest-rate curves: one for each currency. Their relationship affects the forward exchange rate and the cost of exchanging money at different dates. A futures option already references a futures price, so its model inputs should follow that contract rather than blindly treating spot as the underlying.
Intrinsic value and time value
For a euro call with a strike of 1.10, a reference rate of 1.12 represents two cents per euro of intrinsic value on a simple immediate-exchange basis. The traded premium may include additional time value. Before expiry, the market price is therefore not just the payoff in an expiration diagram.
A trade can lose value even if the pair moves in the expected direction. The move may be small relative to the premium paid, time may have elapsed, or implied volatility may have declined. Compare the bid available to sell the option, rather than treating a model midpoint as cash in hand.
Read a quote in the right units
Confirm whether a premium is quoted in currency units, points or a percentage of notional, and which currency is paid. Multiply using the specified contract amount and quote scaling. The “100 shares per contract” assumption used in many stock-option examples should not be carried over to currency contracts.
Our stock-option payoff calculators illustrate expiration shapes, but are not currency-option valuation engines. For FX trades, use a contract-aware tool and verify its units, interest-rate assumptions and settlement conventions. Continue with currency volatility and the Greeks.
Sources and further reading
Official references for the mechanisms and contract conventions discussed here. Follow the provider’s current contract rules when evaluating an actual product.