Barrier options are effective instruments of financial markets. Range currency options. o Identification of risk - when certain foreign exchange transactions are made, it is important to correctly assess the fluctuations in exchange rates throughout the entire period of validity of the counter

Barrier Options- are options, the payouts of which depend on the price reaching the underlying asset, which occurred during the existence of the option. The corresponding price level can be seen as a trigger, turning the option on or off. This is why barrier options are often referred to as trigger options.

With the exception of such an additional parameter as the trigger, barrier options are ordinary European options (plain vanilla). Barrier options are almost always cheaper than European options of the corresponding series: they have the same maximum return, but the probability of receiving it is lower as a result of some peculiarities in the price movement of the underlying assets.

Barrier options, along with Asian ones, are the most popular among numerous exotic derivatives and account for 10% of the total volume of foreign exchange options on the OTC market. Unlike other exotic options, they are often delivered rather than settled.

It should be noted that barrier options were traded on the American markets even before 1975. However, they gained the greatest popularity in the late 80s in Japan (the times of the so-called "inflated assets").

Types of barrier options

1. Trigger that includes an option - knock-in
2. The trigger that disables the option is Knock-out.

Each of them is subdivided into two more subtypes depending on the movement of the price direction:

• "Up & In" - the option comes into effect when the price rises to the agreed level;
• "Up & Out" - the option expires when the price rises to the agreed level;
• "Down & In" - the option comes into effect when the price falls to the agreed level;
• "Down & Out" - the option expires when the price falls to the agreed level;

All four options can be applied to both classes of barrier options - Call and Put. Thus, there are eight combinations, which are conventionally divided into reverse (reverse) and normal (normal) trigger options.

Barrier options are denoted as follows:

0.9020 EUR Call/USD Put RKI @ 0.9125 mkt 0.9077

Where: 0.9020 - strike price; EUR Call - an option to buy EUR against USD; RKI - reverse option (Reverse Knock-In); 0.9125 - trigger value; mkt 0.9078 – spot price level, which determines the validity of the quote (it is not always present, because, depending on the decision of the currency player, the quote can be set regardless of the current price level).

Using Barrier Options

Simple American and European options can be used to form various option strategies, which not only significantly expands the range of modeling possibilities, but also significantly reduces costs - after all, barrier option premiums are lower.

An example of the Bull Spread strategy (see Fig. 1). It is built by buying a more expensive call option with strike S1 and then selling a cheaper option with strike S2 ​​(where S2 > S1). The maturity date and the volume are the same. It turns out the curve of the financial result, which has the following form:

(Fig. 1 - Bull Spread Option Strategy)

Barrier Options Variations:

• Money-Back Options (options "Money back") - with a concession, the amount of which is equal to the initial premium. Most often, these are Knock-out options, and they are quite expensive. Can be used as a loan instrument that gives the buyer of an option to the seller.
• Exploding Options - Reverse Knock-out options with a rebate equal to the amount of intrinsic value.

Double Barrier Options are options with second market barriers. In this case, the trigger value is set as a formula that uses the prices of several assets in one or more markets. Another name for them is Dual-Factor Barrier Options.

Barrier options are effective instruments of financial markets

Exotic options have become actively used in financial markets, the most popular of them are binary and barrier options. They have a number of specific features, including elasticity parameters, which make it possible to achieve high performance indicators for trading operations.

Exotic options have become actively used in the financial markets in recent decades. Unlike vanilla options (plain vanilla options), otherwise known as standard options, they have a number of additional features, primarily expressed in the presence of certain clauses that are not typical for traditional types of options.

Types and features of exotic options

For vanilla options, a prerequisite is the indication in the contract of the type and volume of the underlying asset, price, type, style. The conditions for concluding contracts when using exotic options may include a number of a wide variety of additional parameters, and even radically differ from standard approaches to defining indicators. For example, Asian options suggest a way to determine the price, but not its specific value, and barrier options can be exercised within a given time interval, as well as canceled depending on a certain price level. Instructions on the price corridor may also be applied, restrictions may be placed when certain indices reach certain values, as well as the exchange rate, while these indicators are not related to underlying assets.

Barrier and binary options are the most popular among exotic types, although such types as range, complex, Asian options or swaptions are quite often used. Investors choose, first of all, options that have a high level of liquidity and are widely available for trading.

Barrier options and binary options have become especially attractive to investors due to the peculiarities of elasticity indicators. At the same time, each of them has a special specificity and is distinguished by a pronounced individuality in the pricing mechanism. However, there are also various exotic options that are very similar in fundamental parameters, and differ only in some minor features. In view of this, experts believe that the classification of exotic options is relative, and there are quite often moments of misunderstanding.

Barrier options

Barrier options got their name from the mechanism of their application, since the price to activate the option must reach a certain barrier level, or otherwise they are also called trigger.

Barrier options can be animating (coming-to-existence) and dying (extinguishing). It all depends on the activation or de-activation of the contract using the barrier, that is, the option is enabled (knock-in) or disabled (knock-out). For example, in a situation where the price of the underlying asset has reached or overcome the barrier, the option is activated and is called Knock-in-Up. If the price breaks the barrier in the downward direction, then the option will also be activated and is called Knock-in-Down. If the price falls below a given barrier without crossing it, then this option is called Knock-out-Down, above - Knock-out-Up, and in both of these cases, the options are de-activated. In some cases, more precise parameters can be applied, for example, the location of the barrier by choosing the Call or Put option. The Knock-in-Down-Call option will come alive if it is in the out-of-the-money situation, and the reverse triggering Reverse Knock-in-Up-Call option will be activated in the money situation.

There are also other barrier options of more complex types. For example, they can be defined by double barrier options, they can be set to effective dates (windows option). There are also a number of options to choose from. For example, the exact date at which a choice can be made can be determined, but the type of option (Call or Put) is not determined.

Barrier options are effective financial instruments that are actively used in trading to obtain stable and high incomes.

17:17 — REGNUM

Since then, there have been many articles in the press discussing this topic. The random sample shows that the majority of authors believe that the decision is unfair to the bank, undermines the foundations of the emerging derivatives market in Russia, creates legal uncertainty for participants in the derivatives market, etc. A closer look, however, reveals that many of these statements are the result of a hasty and very superficial reading of the judgment, and the threats to the Russian derivatives market are greatly exaggerated. Although the format of this article does not allow for a detailed - with reference to accumulated international experience - justification as to why such a hasty reaction may turn out to be erroneous, it is nevertheless quite appropriate to outline some elements of the legal analysis of this decision, albeit outlined, in the following few paragraphs. .

The arguments of the authors, who are critical of the Arbitration Court's decision, boil down mainly to the following: (i) a currency option is a fairly simple transaction, and it is inappropriate for a company like Transneft to claim that the company did not understand the risks associated with the transaction when entering into it, (II) the court showed excessive paternalism in relation to the company, protected it from the consequences of its own actions and unjustifiably imposed fiduciary obligations on the bank, which merely acted as an ordinary market counterparty to the transaction, (III) when analyzing the integrity of the bank, the court assessed not so much the contractual documentation, how much the bank's pre-contractual presentations about the product, and (iv) the decision hinders the development of the Russian market for hedging instruments. Let's look briefly at each of these arguments.

“An option is a simple transaction understandable by Transneft”?

This argument is either the result of deliberate cunning, or a demonstration of deep ignorance of the subject. There is nothing simple in an option, especially if you sell this option. An option, including an option on exchange rates, is considered one of the most complex financial instruments, especially if one of the currencies is an emerging market commodity currency, and the transaction is concluded under a barrier condition. The complexity of a financial instrument is manifested in its pricing, which reflects a whole tangle of difficult-to-calculate risks, variables and assumptions. Generations of financial mathematicians have worked on financial models for use in option pricing. The world-famous Fisher Black and Myron Scholes, who developed the most widely used price model since then for calculating the value of a “simple” (without additional elements) option, received the Nobel Prize in Economics for their development.

It is significant that in the structure of large banks there is a special subdivision for options trading, which has its own staff of mathematicians specializing in this product, building and applying their own mathematical models. Based on the basic models for calculating the value of an option, bank dealers develop their “add-ons” for various types of the underlying asset (including exchange rates), as well as for various types of elements that complicate the forecasting of option payouts. For example, the barrier condition exacerbates the difficulty of the already complex mathematical calculation of the value of an option to such an extent that it makes the Black-Scholes model not directly applicable, since such an instrument is an option on an option according to the "risk profile". Instead, dealers (banks), using complex mathematical packages, create their proprietary "distributed" financial models (ie, combining elements of various price mathematical models). Companies, even large ones, whose core business is not trading in complex financial market instruments, as a rule, are not able to repeat such an examination.

The value of an option is derived not only from the price parameters for the purchase and sale of the underlying asset, but also from the degree of probability that the option will be exercised. Five variable elements affect the price of an option: (I) the strike price, (II) the time to expiration of the option, (III) the level of interest rates, (IV) the price action of the underlying asset, and (V) the spot price of the underlying asset. asset. At the same time, the value of an option reacts to fluctuations in the price of the underlying asset in a completely different way than other types of derivative financial instruments: it is sensitive to changes in any of these five variables (the strike price can also change in non-vanilla option contracts). To characterize the sensitivity of the value and other properties of the option to a change in certain values, various coefficients are used, named by the letters of the Greek alphabet (“Greeks”) - delta, gamma, theta, vega, rho and lambada. Unlike an option, the value of an interest rate swap, for example, depends on only one variable, the interest rate described by the yield curve; The cost of a bond futures depends only on the spot price of the underlying bond and the current repo rate, while the price of a currency futures depends on the spot rate and interest rates for each of the currencies of the currency pair. But the main thing is that unlike other financial instruments, the relationship between the value of an option and the change in any of the five elements is not linear. This complex multi-variable sensitivity of an option makes it the most difficult financial instrument to manage its risks.

To illustrate the “simplicity” of an option as a financial instrument, let me give you a typical popularized (!) basic explanation of the behavior of the above properties of an option: “when the option is deep in the money (in-the-money) or deep out of the money” (out-of -the-money), its delta does not change dramatically and its gamma is therefore rather negligible. But when an option approaches at-the-money, its delta can change suddenly and its gamma is large. A long option position has a positive gamma, while a short position has a negative gamma. Large gamma options are more difficult for market makers because hedging them requires constant adjustment to maintain a neutral delta, which results in significant transaction costs. The larger the gamma, the greater the risk that the option book will be affected by sudden market movements. A position with a negative gamma represents the highest risk and can only be hedged by a long position in other options.” Or another example: “managing an option book requires choosing between gamma and vega, as well as choosing between gamma and theta. A long position in an option is a long position in vega and gamma. If volatility declines, the market maker may opt to maintain a positive gamma if he believes that the decline in volatility can be offset by adjusting the gamma in the direction of the market. On the other hand, he may prefer a position with a negative gamma by selling options, i.e., by selling volatility. In both cases, the cost of rebalancing the delta should offset the decline in volatility.” I am convinced that any author who claims that an option is a simple financial instrument will not even be able to repeat the truths given above for option dealers, let alone explain their meaning. Specialists, for whom the above passages are clear, will not call an option a simple financial product. But understanding the interaction of these coefficients (Greeks) is the minimum necessary skill for understanding and managing risks in options. It is no coincidence that the classification of financial instruments adopted in accordance with European directives classifies currency options, especially those with a barrier condition, as complex financial instruments that require the dealer to take special care of the client's interests.

The ability or inability of a company to understand the risks involved in entering into a transaction is a matter of fact, which is established and assessed by the seller of such a product (the bank) or, if there is a dispute, by the court. At the same time, the more complex and risky the product, the more information the dealer must obtain about the client, his knowledge and experience in handling similar instruments and making deals in the past, about his business and the need for such a product, as well as provide the client with complete and clearly stated information. about the product to ensure that the customer understands the risks involved.

International law enforcement practice in the field of derivative financial instruments proceeds from the fact that such experience and knowledge of the client should not be established in the abstract, but in relation to a specific type of transaction. The experience of dealing with derivative financial instruments in the past is not transferable to other instruments with an excellent risk profile. For example, the fact that a client concludes even similar transactions is far from being an “indulgence” for a dealer, since, firstly, it does not in itself indicate an understanding of the risks by the client, and secondly, it may not be applicable when concluding a more complexly structured transaction, for example , transactions with a barrier condition. Complication of the transaction by a barrier condition can completely distort the expected payments on it.

It can be seen from the court decision that the parties had previously entered into transactions with derivative financial instruments, but with different conditions and purposes (they were aimed at hedging the risk of a fall in the dollar exchange rate), and also without a barrier condition; at the same time, the bank evaluates such transactions as “similar”. If the company had significant foreign currency balances, then you can use options to hedge the risk of a fall in the foreign exchange rate by purchasing a put option. At the same time, the company, as follows from the decision, stated that the disputed transaction was not a hedging transaction for it, and the structure of the transaction described in the decision confirms this. If, as in the case of the disputed transaction, the bank had previously sold “double” call and put options to the company, where the bank acted as the seller of the put option and the buyer of the call option (and on this basis, the court referred to the earlier concluded “similar” transactions), then setting the barrier at a level well above the current spot rate makes the put option practically meaningless for the client as a hedging instrument (since the probability of its execution tends to zero), and the transaction essentially boils down to the sale by the company a call option jar with unlimited risk to the client. In this regard, it is noteworthy that the argument that the company had experience in concluding similar transactions was brought by the bank and carefully examined by the court. Based on the results of the study, the court concludes that “[t]he evidence presented in the case file and the explanations of the parties, the court found that the Claimant had not previously entered into transactions with derivative financial instruments, the terms of which would be similar to those of the disputed transaction.”

The text of the court decision does not provide an opportunity to form an informed idea of ​​the level of understanding by the company of the risks that it assumed when concluding the transaction. An important factor in this analysis is the correspondence between Sberbank and Transneft when discussing the terms of the controversial transaction: whether it demonstrates the level of discussion that shows that both parties "spoke the same (preferably with elements of Greek) language." If, instead of a professional discussion of the elements that are essential for the option, the discussion boiled down to the fact that “over the past three or four years, the volatility of the ruble has been insignificant, therefore, by selling a call option with a high barrier, you risk little, but earn a lot”, then this will expose the same asymmetry in the expertise in option trading between Sberbank and Transneft as the asymmetry in the distribution of risks between the seller and buyer of the option. In this regard, it is interesting to note the court's remark that “[d]ues of the Respondent about the Claimant's understanding of the disputed transaction, knowledge of the formulas and risks associated with the transaction are not supported by the case materials. The correspondence on the transaction submitted by the parties prior to the date of its conclusion does not indicate a proper explanation to the Claimant of full and objective information about the transaction, the mechanism for calculating the amounts of payments under it and the associated risks. It is also indicative that after the conclusion of the transaction, the bank had to additionally explain to the client how the options will be settled.

“Russian courts in similar disputes have previously not taken into account the arguments about the lack of understanding by the affected party of currency risks”

To substantiate this argument, the authors of the publications refer to court decisions on the claims of borrowers on foreign currency mortgage loans. Drawing an analogy with such lawsuits, the authors argue that the Russian financial market has been living in conditions of volatility in the exchange rate of the national currency for 25 years, and when the parties take on the currency risk, the Russian courts do not heed the complaints of persons who have suffered from an unfavorable change in the ruble exchange rate. This analogy is simplistic.

From the point of view of the classification of financial instruments adopted by the international community, deposits, bonds or loans denominated in a currency other than the currency of the state of the place of the transaction are classified as simple financial instruments. Indeed, the structure of such a financial transaction is quite simple - the face value and interest (coupon) rate by their nature do not differ from the same indicators inherent in similar debt instruments denominated in the national currency. The main thing is that when placing a deposit or attracting a loan in foreign currency, the depositor or borrower already knows at the time of the transaction how the payment obligations under the transaction will be formed. A completely different thing is a currency call option with a barrier condition. First, at the time of its conclusion, the parties do not know whether the option will be exercised (ie, whether the spot rate will exceed the value of the strike rate at the date of option exercise). In this regard, it is noteworthy that in the disputed transaction, the strike rate was equal to the spot rate on the date of the transaction, and not the forward rate (which was higher taking into account the higher interest rate on rubles), which means that the client has sold an option that was already in-the-money for the bank at the date of sale. In the case of a barrier option, the parties do not even know whether the option will be exercisable, that is, whether it will come into effect. Secondly, if the option is exercised, at the time of its conclusion, the parties do not know the amount of the option payout, which depends on the future value of the spot rate of the base currency. It is important to note, however, that with regard to a call option, the size of such payments is potentially unlimited. That is why international experience in the field of regulation of financial markets requires the client to have special knowledge and experience in option trading as a precondition for the dealer to complete a transaction to purchase an option from the client. Especially when it comes to buying an “uncovered” (not secured by the underlying asset) option — the so-called “naked call option”, which creates one-sided — unbalanced in the event of an increase in the price of the underlying asset — risks for its seller.

The sale of just such a “bare” call option was structured by Sberbank in a transaction with Transneft, and so far Russian judicial practice has not expressed its attitude to such transactions. The analogy between taking out a mortgage loan and selling an unsecured settlement currency call option by a non-professional in this respect does not stand up to criticism and runs counter to the global practice of regulating financial transactions.

"Judicial paternalism towards a bank client"

In international regulatory practice, transactions are divided into inter-dealer and client transactions. In inter-dealer transactions, the parties do not have an obligation to take care of the interests of the counterparty. In client transactions, the dealer (professional market participant) is obliged to take care of the interests of the client. Elements of such diligence include: (I) classifying the client according to his level of competence in dealing with relevant financial instruments, (II) evaluating the proposed instrument for its suitability to achieve the client's goals in the event that the bank advises the client on the transaction (suitability ), (III) assessing the risks posed by this type of financial instrument in terms of the client’s financial capacity and risk appetite (appropriateness), (IV disclosure to the client of the risks posed by the financial instrument and explaining such risks in a “full, clear and in a misleading way”, (V) an assessment of the financial competence of the client in terms of his understanding of the risks posed to him by the financial instrument, and (VI) the execution of the transaction on the best terms for the client.

There is also an intermediate category of transaction participants - a "professional" client (other clients are referred to as "retail clients"). The criteria for assigning a client the classification "professional" is very strict. The level of care required when entering into a transaction with a professional client is significantly lower than with an ordinary client, and in many ways approaches inter-dealer transactions. In this case, if the bank advises the client on the transaction (i.e. sends him personally recommendations and (or) other information about the proposed transaction), then the bank is obliged to assess the suitability of the transaction for the client (suitability), regardless of the classification of the client either retail or professional. A personal recommendation is a recommendation structured for the specific circumstances of the client (for example, as in a disputed transaction, setting the option par value in the amount of a bonded loan). It is noteworthy that European regulators did not previously extend such a requirement to transactions with professional clients, but subsequently, in the face of increasing complexity of financial instruments, they extended this standard to all dealer-client transactions, to transactions with large and experienced consumers of financial services.

In Russian conditions, there is no similar classification of participants in transactions. The current breakdown of participants into three categories - professional market participants, qualified investors and others - is based on formal criteria and is a sign of weak development of the derivatives market and its regulation. It seems that the classification of products according to the criterion of complexity should take into account the degree of market maturity. It would be quite natural if the same financial instrument required a different degree of “paternalism” on the part of the bank (or court) in jurisdictions with different levels of derivatives market development. Recall that not so long ago in the Western markets such seemingly simple instruments as interest rate swap and currency interest rate swap were treated by the regulator as complex financial instruments. As we gain experience in the use of derivative financial instruments and manage the risks associated with them, as well as a more meaningful categorization of market participants depending on their real experience, rather than formal criteria, it will be possible for us to weaken the degree of required care for the interests of the client on the part of the bank or dealer. In the meantime, the dispute between Sberbank and Transneft should calm down the sales departments of the leading financial institutions on the Russian market and give them a greater share of responsibility for providing recommendations to clients. In the absence of meaningful (rather than formal) regulation of the status of market participants with varying skill levels in a young market such as Russia, all clients who are not professional market participants for the purposes of dealing in complex derivatives should be treated a priori as “retail clients”. » according to the international classification, i.e. enjoy the degree of protection provided in international practice for unqualified investors. Over time, as the market develops and its participants gain experience, some of these tools will move from the category of complex to the category of simple ones, and in their respect it will be legitimate to weaken the required degree of protection for those who do not need it.

It seems that the leading banks and dealers in the Russian market should be guided by the highest standards of international market practice and provide customer care in line with international best practice, rather than capitalizing on gaps or shortcomings in the Russian regulatory framework. Disregard for such standards, as practice shows, is fraught with significant legal and reputational risks.

Presentation or contract documentation?

In international practice, the dealer's obligation to ensure the suitability of a financial instrument for the client (suitability) has two aspects: (i) ensuring the suitability of the instrument itself for the client's purposes, and (ii) ensuring the proper way of offering and selling it to the client. This implies that the dealer must ensure that the customer properly understands the risks of the tool and makes an informed decision to accept them (provided that the tool itself meets the suitability criteria). In particular, the dealer's description of the proposed tool must be "comprehensive, understandable and not misleading". Violation of these requirements may result in a defect of will on the part of the client when deciding to make a transaction, since it does not allow him to make an "informed" decision about the risks and benefits of the proposed instrument.

Assessing whether the bank's actions prior to the transaction were appropriate is a matter of fact. Without access to all the materials of the case, it is very difficult to comment on the fairness of the assessment of such actions by the court, however, contradictions, inaccuracies and errors in the presentation materials, underestimation of the risk of reaching the barrier rate and other flaws in the discussion of the transaction with the client, given in the court decision, as well as the formal a few days before the date of the transaction - the disclosure of the risks of the transaction, of course, is not in favor of the bank. Contractual documentation can by no means eradicate all of the indicated flaws in dealer sales practice, since it concerns completely different issues. Of course, there may be stipulations that the client understands the risks, acts at his own risk, does not rely on the advice of the bank when concluding a transaction, etc. The extent to which such provisions of the contract can serve as a basis for releasing the dealer from liability for creating false expectations in the client depends on many factors (including actual circumstances) and is decided differently in different legal systems. But in any case, these factors are at the discretion of the court, whose decision becomes a guideline for future standards for the sale of financial instruments in the relevant market.

"The decision of the Arbitration Court adversely affects the development of the hedging institution in the Russian market"?

In a recent speech to reporters, Bela Zlatkis, deputy chairman of the board of Sberbank, said, commenting on Sberbank’s intention to appeal the decision of the Moscow Arbitration Court, that “everything will be decided to everyone’s understanding, to the correct position, to the development of the market ... all the more so now, of course, it is very important hedging in the Russian market, because many are under sanctions, for many hedging is not available, and this, of course, is very unpleasant.”

The development of risk hedging instruments is a necessary element of the modern financial market. Such a development, however, assumes that the regulation of the market and, if necessary, the judicial system will keep its participants from excesses and ensure a balance of interests of all its participants. Therefore, one has to disagree with the bank's position that the court decision creates an obstacle to the development of hedging instruments in the Russian market. The fact is that the controversial transaction can hardly be called a hedging transaction. On the contrary, this transaction created risks for the company. Moreover, the risks are not commensurate in size with the financial benefit for the company from the purchase of the instrument offered by the bank. Packed in a beautiful box with a bow, the bank sold the client a time bomb. It is noteworthy that earlier similar transactions with options were characterized by both parties as hedging: payments on the call option sold by the company with the growth of the dollar were offset by an increase in the value of foreign currency balances against the ruble (after all, the company bears expenses mainly in rubles), and potential losses from depreciation of the dollar would be compensated through the exercise of the put option purchased from the bank. Unlike earlier transactions, however, the disputed transaction was essentially a sale by the company to the bank of a put option, since once the exchange rate reached the barrier value, the probability of exercising the put option was negligible.

Such an instrument—which was essentially the sale of a call option by the client—has nothing to do with the hedging itself. The only thing that connects this instrument with bonds is the par value match. At the same time, such a coincidence from the point of view of economic correlation is absolutely arbitrary. In addition to marketing attractiveness, linking the face value of the option and the bond does not carry any semantic load. The bond is denominated in rubles and does not create currency risks for the company, whose income and expenses lie mainly in the ruble zone. The conclusion of a controversial transaction gave the client an unlimited risk of a fall in the ruble exchange rate, which has no correlation with the indicated bonds. The client’s losses on the option were not offset by a mirror increase in income (real or even accounting) in any other positions from the devaluation of the ruble - such losses were initially included in the transaction as a pure, unbalanced and unlimited currency risk for the client. As noted above, its hedging function was largely leveled by the inclusion of a barrier condition in the deal.

Noteworthy in this respect is Sberbank's argument that "Claimant ... did not suffer significant losses under the transaction, since Claimant had sufficient foreign currency to complete the transaction, and therefore Claimant had no currency risk." In this wording, this argument, of course, seems absurd in the light of the fact that, as a result of the movement of the exchange rate, the bank issued a demand to the company for the payment of 67 billion rubles!!! It would probably be more correct to argue that the presence of amounts in US dollars on the company's accounts, comparable in size to the par value of the option, at the time of the transaction, compensated for possible losses on the transaction as a result of the depreciation of the ruble. However, the mere fact that the company has currency at the date of the transaction does not make this option "secured", and the transaction itself - hedging: the company could have its own plans to use the currency in its core activities, and the terms of the transaction or the presentation materials of the bank were not specified ( as far as it can be judged from the text of the court decision) reserving some amount for a controversial transaction. As foreign currency is spent on capital investments or operating expenses, the specified option would lose "coverage" and an ever-increasing delta between the company's foreign currency funds and the nominal value of the option would increasingly turn this option into uncovered.

Conclusion

Of course, the recognition of a new type of financial transaction as invalid causes reasonable concern among market participants in such instruments. However, some decisions - even such radical ones as invalidating the deal - can be useful for the development of the market. Of course, the share of responsibility in concluding a transaction lies with both parties, but practice knows many examples when, due to differences in the position or level of competence of the parties, such responsibility is distributed unevenly. Banks and other financial market professionals have traditionally experienced increased responsibility for the client. “The banker is a member of a profession practiced since the Middle Ages. Since then, a code of professional ethics and customs has matured, on the observance of which his reputation, success and usefulness depend on the community in which he works ... and if in his activity the banker neglects this code - which can never be expressed in legislation, but has the power more powerful than any law, it sacrifices its credibility. Such trust is his most valuable asset; it is the result of many years of honest and honorable dealings… A banker is obliged at all times to conduct himself in such a way as to justify the confidence in him of his clients and preserve it for his successors… The thought that we should do only first-class business, and do it only in a first-class way, never leaves our minds… “It is these criteria that should determine the behavior of professional market participants, especially when it comes to its flagships. Whether these criteria were met in the controversial transaction between Sberbank and Transneft is largely a matter of fact to be established by the court. But many of the rules formulated in the decision of the court of first instance, in the opinion of the author, do not at all run counter to the goal of improving the market for derivative financial instruments. On the contrary, in the absence of detailed regulation at the level of legislation or professional standards, such rules set guidelines that market participants must adhere to in order to avoid excesses. This is a normal symptom of growing pains.

The price model is built on the very generous assumption that the change in the price of the underlying asset follows a so-called "standard underlying" or "normal" distribution. Financial mathematicians here would give an explanation that the main characteristic of such a distribution is the standard deviation, hence the importance of the concept of underlying asset price volatility.

The only exception to a number of Greek letters, sometimes replaced by the Greek kappa.

From a speech by Dsojon Pierpont Morgan (Jr.) to the US Senate Banking Committee on May 23, 1933.

(https://fraser.stlouisfed.org/scribd/?item_id=33957&filepath=/files/docs/publications/sensep/sensep2_pt01.pdf#scribd-open)

What is such a financial instrument of enrichment as a deposit-backed currency option? What features exist here? What should you focus on when making deals?

general information

Let's deal with the terminology. What is an option? This is a kind of contract that allows you to exchange one currency for another if the deal is winning, and abandon it if it is not profitable. In this case, you can act according to two schemes: "call" (call) and "put" (put). In the first case, it is possible to purchase a predetermined amount of currency on a specific day and at a predetermined price. "Put" provides for the sale on the same terms. Deposit-backed currency options are offered by banks to their clients. They are carefully organized. It includes such instruments as a currency option and a deposit. Why is such a product offered at all? Thus, banks give their customers the opportunity to earn a higher percentage than is offered by conventional deposits. But at the same time, it is necessary to understand that savings are also subject to currency risk.

About the benefits

A standard currency option has the following advantages:

1. Opportunity to receive more significant income than under the terms of a simple deposit.
2. Flexible choice of term, currency pairs, rate and profitability.
3. A short period of placement, usually up to three months.
4. Possibility of remote registration.

Who is it suitable for?

Holders of cash savings, assets and liabilities, who have their own vision of how rates will develop, can try options on currency pairs. Of course, if they are not afraid of risks. When choosing this type of investment, it is necessary to give preference to the base and alternative currency pairs, a carefully chosen period of placement, as well as the exchange rate. What should be invested in? The base currency is used for this purpose. But it can be converted into alternative funds according to the previously set rate. The income received from this transaction is an option premium. It is formed from the difference in exchange rates. The currency options market is quite developed, so if you want to find a niche that is convenient for you, it is not difficult.

What do you need to do to make money?

Suppose the reader is interested in a currency option transaction. What do you need to do to participate in it? On the day of registration of the option, you should:

1. Deposit a certain amount in a pre-selected base currency. As such, the Russian ruble, euro, US dollar, British pound sterling, Chinese yuan or Swiss franc are most often used. Options may vary slightly between financial institutions.
2. The second currency is selected.
3. The placement period is set. As a rule, a range from seven to ninety days is available.
4. The exchange rate is negotiated, as well as the premium for the currency option. Remember that the larger the amount you claim, the higher the risks.

When the day of determining the option comes, then there are several options for further action:

1. If the exchange rate is less profitable or equal to the one determined at the time of the conclusion of the contract, then on the day of return the person claims to receive the amount of his investments, interest on the deposit, as well as an option premium in the base currency. Alas, this is a failure.
2. If the rate is more profitable than the one determined by the person, then he receives all the amounts of money due to him in an alternative currency.

Let's say a word about the award

Probably, now many readers are interested in one question. How is the option premium determined? The task of paying out cash is entrusted to the trader who purchases the option. Such an option of investing money together with the interest accrued on the deposit will allow you to get a high income. Of course, if there were corresponding movements in the market. Let's look at a small example to explain how this system works. Suppose a person has an assumption that the value of the euro will increase from 90 to 95 rubles in a week. Since it assumes the growth of the currency, the choice is made in favor of call options. Then they are bought from a broker, often accompanied by certain surcharges. But let's not talk about them for now. If the rate really rose, the value of the option also increases with it. At the same time, no additional investments are required from a person. The option itself can be stored until the end of its term, or it can be exercised at any convenient moment before the end of the agreements.

About individual moments and development

The tool considered in the framework of the article is constantly changing and improving. There is even something that was not there before. One of the latest developments is binary currency options. This is such an amazing transformation of securities that one can hardly see their ancestors in them. What is their feature? Initially, any asset is completely thrown out of circulation. The main object here is the price. Traders are interested in its behavior over a certain period of time, and that is what they bet on. If they think that the price will rise, then they take a “call”, if they think it will fall, they take a “put”. You see, even these words have lost their original meaning. At the same time, the price of an asset does not depend on its behavior. In this case, the most interesting is the percentage of the value at the time of the agreed day to the amount of the rate. This is what the premium is based on. The more bet, the greater the win, as well as the risk of losing money. If the investor's bet has not played, then the premium remains with the broker. As you can see, binary currency options provide that only one side will win.

How to make a profit?

The considered financial instrument attracts a large number of speculators of all stripes. Well, this is not surprising, because it allows you to get huge incomes. And at the same time, the probable losses are clearly recorded. But if this is such a profitable business, then why are there those who are ready to sell currency options? And the answer is simple: the amount of premium that the seller of the option receives is commensurate with the risk of unlimited losses. Does it make sense to get involved in this whole story? Theoretically, it is quite possible to become a successful bidder. To do this, you only need to be the first to know about all fluctuations in the exchange rate, be able to predict its changes and have information that others do not know about. Otherwise, it will be very difficult to compete. It should be understood that financial activity has significant risks. Here are some examples:

1. The price of transactions is overstated in comparison with other types of investments.
2. You need to have a deep knowledge of finance, as well as relevant experience. Currency options are difficult to implement, and it is impossible for everyone to succeed in this area.
3. It should be borne in mind that such an investment is extremely time-bound. Therefore, many contracts remain unfulfilled.

As you can see, making money in this case is not so easy as it might seem at first glance. Is it worth risking your money, time and nerves - everyone decides for himself. The main issues have already been considered, let's pay attention to additional points.

Administrative difference

Initially, currency options began to be used in Europe. But over time, they gained great popularity in America. Now they are also widely used in Asia. At the same time, depending on the geopolitical attachment, their own characteristic features appeared. The most popular now is the American model of interaction. Its feature is the possibility of early execution of rights. The European model is aimed at obtaining medium incomes with minimal risks. Asians perceive an option as a specific commodity, which should have its own price. For this, exchanges are widely used.

What to play?

People who have decided, but have not yet begun to act, are for the most part interested in the question: what are the best currency pairs for binary options? Unfortunately, there is no 100% correct answer here. To do this, you need to be aware of the many different trends, specific moments and other elements of successful investing.

Let's look at a small example. Here we have the euro, US dollars and yuan. What can be said in this case? The most predictable pair is the dollar and the yuan. The Chinese government supports the export economy. And for this you need a cheap own currency. Therefore, they constantly depreciate the yuan against the US dollar. But this is not all possible field of activity. Other interesting currency pairs for binary options are euros and dollars, as well as the money of the European Union and the yuan. True, it is impossible to accurately predict here. So, now the euro exchange rate against the dollar is growing, although just a year ago it was steadily falling. And it was seriously believed that the euro would become cheaper than the dollar.

Conclusion

You must be aware that financial activities involve enormous risks. There are always losers and winners in it. And if you do not have the necessary knowledge, experience, acumen, then there is a very high probability of falling into the first category, the losers. This topic is quite broad and requires considerable preparation. One could also talk about barrier and range currency options and other financial instruments. But to fully cover this topic, even speaking in passing, the size of the article is not enough. Even one book will not be enough. For people who want to conduct successful financial activities, there is the possibility of obtaining a full-fledged higher education, which now takes four years. Yes, not all the information that is taught is useful, but consider whether it is worth competing with those who have studied well and have a good understanding of financial processes.

A currency option is one of the types of emissive securities. Such a document is especially popular in the foreign exchange market and in banking. It is acquired mainly by traders who earn money by buying and selling foreign currency.

How is a currency option different from a regular option?

An option is a contract, one of the parties of which acquires the right to sell (buy) the underlying asset at a fixed price in a predetermined period of time. Currency refers to a document whose underlying asset is a currency unit. Such securities are very common in interbank relationships and in specialized markets.
Each contract must include the following:
1) Document type. A security can be divided into two types depending on the right that it gives after acquisition.
2) Underlying asset. The currency pair, which is the main object of the contract, must be precisely specified.
3) Strike price (execution price). The seller of the option is obliged to sell (buy) the asset at this price, regardless of how it has changed over time.
4) Deadline. The buyer can exercise his right only within a certain period, usually from several days to several months.
5) Option premium- the amount of money that the buyer pays the seller at the time of the conclusion of the contract. The fee is a kind of compensation for the risk assigned to the seller, quite often it is called the option price.

Main types of currency options

The contract holder can either sell or buy the underlying asset. Depending on this, the contract can be divided into two types.

call options

A call option (buy option) is a contract in which one of the parties obtains the right to buy the underlying asset. The sale price is agreed in advance and does not change during the entire transaction. The seller is obliged to purchase the asset at the strike price, no matter how much it differs from the market price, in return for which he asks for a small premium.

A currency option is a great way to make money on exchange rate fluctuations. The trader purchases it in the hope that the value of the base currency will increase in the near future. The purchase of a security differs from ordinary investments in a currency with minimal risks, because even if the underlying asset becomes much cheaper, the trader will lose only the money that he gave to the seller as a premium.

An example of using a currency call option

A trader purchases a security to buy euros at the current exchange rate (for example, 50 rubles). He does this in the hope that during the validity of the right given to him, the course will begin to rise. The premium is 5% of the amount that can be purchased. If the investor wanted to receive 1000 euros, he must pay 50 to the seller. A currency call is profitable only if the rate increase is more than 5%, otherwise it will give the seller more than it earns on the difference between the strike and the market price.
Let's assume that during the indicated period, the euro has grown by 10%, which means that the investor will receive 5% of the profit from the amount of invested funds, i.e. 10% increase - 5% premium. If you subtract 5% of the amount of 1000 euros, you get a very insignificant profit of 50 euros. Experienced investors work with more impressive amounts, and even such a small increase can give an excellent income.

Put options

A security that gives the holder the right to sell an asset at a specified price is called a put option.
In the foreign exchange market, puts are mostly needed to hedge investments already made in the currency. For example, in the event that a trader keeps his savings in foreign currency, but soon learns about future inflation. Then he acquires a put and can be calm: the funds that he invested will return to him minus the minimum spending on the contract.

An example of using a currency put option

You can earn not only on the growth of the exchange rate, but also on its decline. To do this, you need to sell the currency in the future at a price that is valid at the moment. To do this, many investors use currency put options.
Suppose that the data of the foreign exchange market indicate an imminent fall in the dollar. Such information is a good reason to earn extra money, but certain difficulties arise here, because in the usual sense, currency inflation is a loss of savings. In fact, with the right approach, even a negative change in the exchange rate can make money.
An investor purchases an issue paper for the sale of a certain amount of dollars at the current price and pays 5% of the amount he wants to sell for such a right. At the time of the contract, the dollar falls by 20%. The trader buys $20,000 at the current price and sells it to the marketer at the strike price. When taking into account the premium, which invariably remains with the seller, the trader earns 15% of the profit from his transaction, i.e. 3 thousand dollars.

"Geographic" types of currency options

For the first time, securities of this kind appeared in Europe, but they found great popularity in America. Gradually, the procedure for exercising the right certified by an option began to change depending on geopolitical attachment: American options operate according to their own principle, European ones - in their own way. In Asia, the American type of security has found another direction of its own.

American option

At the moment, it is the American model that is more popular and widespread. It is used everywhere and, oddly enough, even in Europe.
Its main difference from the European model is that early expiration is available to the buyer - the exercise of data rights in the option.
Early execution of the contract is beneficial for its holder. At the time of its action, the price of an asset can greatly increase or, on the contrary, decrease. The trader has the right to convert the currency at the moment when it will be beneficial for him.

European option

The premiums for such a document are slightly below the average level. The fact is that the seller is exposed to minimal risk, since the buyer cannot use early expiration. From the moment the contract is concluded to its execution, a certain period must pass. Only after this time has elapsed can the buyer exercise his right. He will not be able to profit from an intermediate increase (decrease) in the price of an asset.

Asian option

An option is a commodity in some way and must have its own price assigned to it. Since the emergence of global options exchanges, many analysts have asked themselves the question: how to calculate the premium correctly.

The most fair calculation model was the one that focuses on the average price of an asset for a certain period. It was first tried by a branch of an American bank in Tokyo. Soon, the contracts, the premiums for which were calculated in this way, were called Asian.

Exotic types of currency options

Gradually, the concept of what a currency option is began to change and take on a completely different form. Types of such documents appeared that are only remotely related to ordinary securities.

Barrier currency options

Options are gambling. Each of the parties to the agreement strives to get the maximum profit, and is ready to lose everything if the outcome is unsuccessful.
Barrier currency options have become the first step towards turning an ordinary security into a global digital market, where the main idea of ​​each participant is to get as much money as possible.
Barrier contracts differ from the usual ones by the presence of an obstacle to the exercise of the right to acquire or sell an asset: in order for the document to be converted, the price of the underlying asset must reach a certain level.
Since the risk of the buyer increases, the contract indicates a more favorable price for him, which may differ significantly from the market price. For example, the seller undertakes to sell dollars at a price of 35 rubles (at the moment they cost 40) if their price reaches 45 rubles within 1 month.
With the beginning of the popularity of barrier transactions, the underlying asset began to gradually go out of circulation. Instead of buying and selling currency, the seller of the security simply reimbursed the profit that the buyer could receive from his further transactions. This approach is beneficial for both parties: the seller spends less of his time, and the buyer is insured against additional risks, for example, from the fact that in the period from converting a document to reselling an asset, the exchange rate may change to a disadvantage.

Range currency options

In the case of them, the buyer can exercise his right only if the exchange rate at the time of execution of the contract is in a certain range, more (less) than the number n, but not more (less) than the number n + m.
For example, a document for the purchase of a dollar at a price of 35 rubles can be realized only if, at the end of the execution period, the rate will be in the range of 36-40 rubles. The price range is offered by the seller, the buyer has the right to demand its change.
The range can be at the level of the current rate, more than it or even less. In essence, the investor is betting on an increase or decrease in the value of an asset.

Binary options have become the latest step in the transformation of conventional securities. They differ from their ancestors very much and you can trace at least some similarity between them only by learning what barrier and range agreements are.

In binary options, the asset is completely out of circulation. The main object was its price. Traders place bets on its behavior over a certain period of time. If they believe that it will rise, they bet on the “call”, that it will fall - “put”. As you can see. Even the concepts of call and put have lost their former meaning.
The strike price does not depend on the behavior of the asset in the foreign exchange market: it is set by the broker (option seller). The execution price is indicated as a percentage of the bet amount. The option premium depends on the buyer: the more he puts, the more he gets and the more he can lose. The premium remains with the broker only if the investor's bet has not played. It turns out that in any case, with money on hand, only one side of the agreement remains, which is why such transactions are often called “all or nothing”.

Currency options in banking legal relations

At the moment, second-tier banks are the most accessible options seller. They distribute securities among both individuals and legal entities.
Ordinary citizens can purchase this security as a guarantor of the reimbursement of a deposit in foreign currency. Options for individuals is a new direction in banking investment, so it is worth talking about it in more detail.
A currency option with a deposit cover is an opportunity to receive a more favorable interest on a deposit and, at the same time, a rather serious financial risk. In fact, this is a put option: the client opens a deposit in the base currency and acquires the right to sell this currency to the bank. The document specifies the rate that the client himself chooses, as well as the amount of the bank's premium. The range of the possible exchange rate is chosen by the bank. The contract has a period of one week to a month. If, after this period, the exchange rate chosen by the client is more profitable than the current one, he can use his issuing document and convert savings into foreign currency at a more favorable exchange rate. In addition, the bank returns the amount of the premium.
If the selected rate is lower than the current one, the client leaves his right unclaimed, and the premium remains with the bank.
That is, for example, a client opens a deposit in the amount of 100 thousand rubles and acquires an option from the bank to convert this amount into dollars at the rate of 38 rubles. At the moment, the exchange rate is 40 rubles. The deadline is one week. For the contract, the client must pay 10% of the deposit, but only if he does not use it.
If at the end of the contract the dollar exchange rate remains unchanged or even increases, the client remains in the black. He uses his right and converts the deposit into dollars at a rate below the market. The bank reimburses the value of the security as a bonus. If the dollar exchange rate fell below 38 rubles, it would be unprofitable for the client to use the option. He simply lets it burn out and in doing so loses 10,000 rubles (option premium).
No matter how welcoming it may sound, such a banking offer is not very profitable. The bank puts forward clear conditions that do not allow the client to make a big profit. The interest on the deposit is usually lower than the market average and the favorable change in the exchange rate only covers this difference.

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