The foreign currency exchange system provides a set of rules that outline the approach of the central bank in the foreign exchange market. The settlement of foreign exchange transactions can be done according to exchange spot: the spot exchange refers to the current exchange that is cash transactions.
Future exchange: the rate futures indicated the price of the currency transactions in the present, but whose settlement date is in the future. The analysis of the budget deficit is compounded when the exchange is fixed. Under a system of fixed rate, the central bank determines the money supply actually the same way as in a closed economy or when operating under a system of flexible rates.
Recall that under fixed rate changes in the money supply is endogenous, and responds to the purchases and sales of foreign currency carried out by the central bank to meet its commitment to keep the exchange rate fixed.
A currency option (fx option) refers to an agreement between the purchaser and the issuer (seller), according to which the buyer has the right but not the obligation to buy or sell a specified amount of currency for currency at a specific base rate at an agreed day or a period of time.
Currency option is a derivative instrument whose primary instrument (sometimes called the underlying) is the currency rate. The height of the course (ie, the settlement rate) is determined on the date of the transaction.
As opposed to the usual spot transactions in the currency or FX forward contract, the transaction is a non-linear (asymmetric). Option granting buyer the right to buy at the base currency exchange is known as a call option. The option granting the buyer the right to sell at the base currency exchange is called a put option.
Call option buyer exercises their right when on the expiry of the reference exchange rate – QTM is higher than the fixed rate strike. However, the put option buyer exercises their right when on the expiry of the reference exchange rate.
There are three groups of options in Online Currency Trading. European option – the buyer can realize their right only on the expiry date, American option – the buyer can realize their right to purchase from the instrument to the expiry of the option. Bermuda option – the buyer can realize their right to a pre-defined time intervals to the expiration date.
Model GK determines the level of volatility of the underlying instrument on one of the above approved level. Statistical tests of historical data series have shown that this assumption is not true. In response to these allegations Heston in 1993 presented an alternative approach to modeling the dynamics of exchange rate changes also take into account the stochastic nature of the variance.