Before entering a position
Identify the underlying currency pair or futures month, notional amount, strike, expiry time and time zone. Check whether exercise is permitted before expiry, which currency pays the premium, and whether settlement delivers currencies, creates a futures position or pays cash. Two contracts with the same pair and date can still have materially different obligations.
For an exchange product, use the exchange specification and your broker’s exercise instructions. For an OTC contract, read the confirmation. Minimum trade sizes, dealing access and available option structures depend on the provider and jurisdiction.
From entry to expiration
The buyer pays the quoted premium under the contract’s payment terms. During the life of the trade, its resale value responds to the underlying, remaining time, implied volatility and interest rates. A displayed model value is not a promise that a dealer will trade at that price.
You may be able to close the option before expiry by an offsetting transaction. Check the bid, ask and transaction costs rather than assuming the original premium can be recovered. At expiry an out-of-the-money option generally expires without intrinsic value; an in-the-money option follows the product’s exercise and settlement rules.
An illustrative hedge
Suppose a US business owes €10,000 in three months. A euro call could protect against the dollar cost of those euros rising. If the euro falls instead, the business may leave the option unused and buy euros more cheaply in the market, but the premium remains a cost. The hedge must match the payment date and available contract size closely enough to be useful.
If the hedge uses an option on futures, exercise may create a futures position. That position can require margin and further action before delivery. The statement “the most I can lose is my premium” describes the standalone long option, not every position that may exist after exercise.
Plan the exit before the entry
Record the broker’s cutoff time, funding requirement and instructions for unwanted exercise. Include weekends and market holidays when matching an invoice. Read futures-option settlement and the risk checklist before selecting a structure.
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.