3.3.2.10 The basics and Australian specific commentary

Set out below are the following:

  • "What is a currency option?"; and
  • "Preliminary issues".

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What is a currency option?

A foreign currency option is a contract where the grantor (seller) grants to the buyer the right (but does not impose the obligation) to buy or sell a specified amount of one currency for another, at a specified price, on or before a specified future date. The grantor charges a premium to the buyer. Also known as FX options.

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Preliminary issues

To document currency options under Australian law using the ISDA Master Agreement participants should ensure that they have executed an ISDA Master Agreement with their counterparty. 

Has the participant used ISDA documents before? If a participant is not familiar with the ISDA documents, it is recommended that they:

  • read the User's Guide and the ISDA Master Agreement;
  • read the 2.1 "ISDA" commentary set out in the Guide;
  • read the 1998 ISDA FX and Currency Options Definitions; and
  • read this part of the Guide, "Currency options".

If a participant is familiar with the ISDA documents, it is recommended that they start by reading this part and refer to the other portions of the Guide as necessary.

Unless otherwise stated, this commentary on currency options is prepared on the assumption that participants use the 1998 ISDA FX and Currency Options Definitions and the 2002 ISDA Master Agreement.

A number of important changes were made to the hard-copy version of the Guide on 1 January 2002. Updates 1 to 8 in 6.1.2 "Updates as at June 30 2007" which can be found in 6 "History", explain these changes. It is recommended that participants carefully read these items.  Take particular care in relation to the comments at the February 2005 Update to Part 5 in 6.1.2 "Updates as at June 30 2007" (ISDA Definitions booklets).

The issues discussed in 4 "Issues", such as regulation, tax/stamp duty, netting, investment managers, novation and collateral, may also be relevant to currency options.