What are vanilla FX options?

Vanilla FX Options provide the right (but not an obligation) to buy or sell a specified amount of one currency in exchange for another currency, at a rate agreed when the option is bought (strike rate), on an agreed settlement date.

They offer full protection against unfavourable changes in foreign currency values. You can benefit from a favourable exchange rate movement by transacting at the prevailing spot rate.

Understanding Vanilla FX Options

Watch this short video to learn how Vanilla FX Options work for both importers and exporters, as well as how they could help your business in managing your foreign currency risk.

Watch how Vanilla FX Options could help you manage FX risk.

View How Vanilla Foreign Exchange Options work transcript (DOC, 21KB), opens in new window

Benefits

  • Determine and budget your cash flows.

  • The opportunity to benefit from favourable foreign exchange movements.

  • Protection against the direct impact of unfavourable changes in foreign currency values.

  • Allows you to manage your foreign exchange risk and provides flexibility if your circumstances change.

Considerations

  • A premium is payable.

  • The strike rate may be less favourable than the prevailing spot rate at the time you buy the option.

There are two types of Vanilla FX Options

  • The right, but not the obligation, to sell a specified amount of one currency in exchange for another currency at a rate agreed when the option is bought (strike rate), on an agreed settlement date.

    Offers full protection against unfavourable changes in foreign currency values. You can benefit from a favourable exchange rate movement by transacting at the prevailing spot rate.

    Benefits:

    • Protection against the direct impact of unfavourable changes in foreign currency values.
    • Determine and budget your cash flows.
    • The opportunity to benefit from favourable foreign exchange movements.

    Points to consider:

    • A premium is payable
    • The strike rate may be less favourable than the prevailing spot rate at the time you buy the option.

    Put Option could be suitable:

    • If you're an Australian importer, or a business with payments in a foreign currency.
    • If you’re trying to protect from a future foreign exchange risk and are unsure on the likelihood of the risk coming to fruition. 

  • The right, but not the obligation, to buy a specified amount of one currency in exchange for another currency at a rate agreed when the option is bought (strike rate), on an agreed settlement date.

    Offers full protection against unfavourable changes in foreign currency values. You can benefit from a favourable exchange rate movement by transacting at the prevailing spot rate.

    Benefits:

    • Protection against the direct impact of unfavourable changes in foreign currency values.
    • Determine and budget your cash flows.
    • The opportunity to benefit from favourable foreign exchange movements.

    Points to consider:

    • A premium is payable.
    • The strike rate may be less favourable than the prevailing spot rate at the time you buy the option.

    Call Option could be suitable:

    • If you're an Australian exporter, or a business with receipts in a foreign currency.
    • If you’re trying to protect from a future foreign exchange risk and are unsure on the likelihood of the risk coming to fruition.

More information:

Managing foreign exchange

Movements in foreign exchange rates can impact businesses differently, so it's important to have a strategy tailored to your specific needs.

Find out more

Learn with NAB

NAB Foreign Exchange

We’ll help you manage your exposure to changes in the foreign currency market so you can get on with running your business.

Managing FX risk with Forwards

Learn how you can lock in the exchange rate for the purchase or sale of a currency on a future date.

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The information provided in this webpage is intended to be of a general nature only. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on any information that you read on this webpage, National Australia Bank Limited (ABN 12 004 044 937, AFSL and Australian Credit License 230686) (NAB) recommends that you consider whether it is appropriate for your objectives, financial situation and needs. NAB recommends that you seek independent advice and obtain and consider the relevant Product Disclosure Statement (available at Financial Markets or by calling 1800 307 827), before acting on any information on this webpage, including whether to acquire or to continue to hold a product or service mentioned.

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