A Guide to

Currency Options
Currency Options can seem complicated, and are often thought of as products used by bankers or
investors to speculate on the money markets. However, this is not entirely true.

The Options offered by Western Union Business Solutions are designed to reduce the risk of being
exposed to fluctuating exchange rates. They are increasingly being used by small and medium-sized
enterprises in certain circumstances to help control this risk and achieve better cash flows.

What is a Currency Option? What is the difference between an

A simple example of a Currency Option is called a Vanilla Option and a Forward Contract?
Option. This gives you the choice of whether or not to sell one
In comparison to a Vanilla Option, a Forward Contract (which has
currency and buy another at a specified exchange rate (the
no upfront cost) also gives you the right to sell one currency and
protection rate) on a date in the future (the expiry date). If,
buy another at a specified exchange rate, on a date in the future,
on the expiry date, the prevailing market rate is less favourable
but it does not give you the right to choose. This means that if the
than your protection rate, you will exercise your right to deal.
market moves in your favour, you are still obliged to buy and sell at
Alternatively, if the spot rate is more favourable you can allow
the specified rate so you cannot benefit from the market movement.
your Option to expire and deal at the more advantageous spot
rate. The right to choose is valuable and, as a result, to take out
a Vanilla Option, you must pay an amount of money up front Forward Options
(the premium) to the counterparty that sold you the Option.
Upfront cost

Known rates
Vanilla Option to sell GBP and buy USD at $1.60 Participate in favourable markets

GBP/USD Although both products protect you should the market move
Customer Rate 1.60
against you, only an Option will allow you to benefit should the
opposite occur. Moreover, whilst a Forward has no upfront cost,
an Option will require payment of a premium. This premium is
Outcome 1 Outcome 2 non-refundable, even if you choose not to exercise your Option
At Expiry date At Expiry date on the expiry date. The premium is a known cost that can be
SPOT Rate is $1.65. SPOT Rate is $1.55. budgeted for so there are no surprises.
The customer can The customer can
exercise their right exercise their right to
How is the premium calculated?
not to purchase the purchase the Dollars A number of factors will be taken into account when determining
Dollars at $1.60 but at $1.60. the premium of a Vanilla Option including how close the specified
buy SPOT at $1.65. protection rate is to the current spot rate, the duration of the
contract, and the volatility of the underlying currency pair. All of
these inputs are used to determine how likely it is that the buyer
of the Option will want to exercise his right to deal at expiry; the
more likely this outcome, the more expensive the premium.
 trading at $1.5300 and the premium would cost 2%. The protection
rate is three cents below the market, but this suits your planned
Notional amount
budget. However, you don’t want to pay the upfront premium.

In simple terms, the equivalent Option giving the right to sell

Volatility Protection Rate Duration USD and buy GBP at $1.5600 would also be worth 2% to
someone needing to sell US dollars, as it is also three cents less
favourable to them than the prevailing spot rate.
% Premium
In order to make your purchase of protection at $1.5000 cost nothing
you sell this opposing option at $1.5600 for the same premium to
This means you should expect to pay more if your Option is due to Western Union Business Solutions. The cost of one premium is
expire just after a significant market event such as an election or an offset by the other.
interest rate decision. Events of this nature can cause a short-term
spike in volatility and possibly shift the exchange into your favour at the
time the contract expires. Similarly, as uncertainty increases over time, 1.58
Outcome 1
1.57
a longer term Option will be more expensive than a shorter term one. Participation Rate
1.56
The table below demonstrates this, and highlights the fact 1.55
1.54
that certain currency pairs will attract a higher premium than Outcome 3
1.53
others. Here we see that the GBP / EUR premium is higher than 1.52
the GBP / USD premium, reflecting the heightened economic 1.51
uncertainty in the EU at the time of calculation. 1.50 Protection Rate
1.49 Outcome 2
Implied 1.48
Volatility1 1M 3M 6M 12M
GBP/USD 8.59% 1.30% 2.00% 2.60% 3.50%

GBP/EUR 9.01% 1.50% 2.30% 3.00% 4.00%

What does that mean at expiry?
Outcome 1
GBP/ZAR 14.91% 2.00% 3.20% 4.70% 6.80%
If the GBP / USD rate is trading above $1.5600, Western Union
Business Solutions would exercise the Option you sold us2. This

Other types of Options
You can avoid paying a premium altogether by using what is known
as a Structured Product or a Zero Cost Option Structure. These
more complex Options can be tailored to your requirements and
market conditions, which could make them an attractive alternative.
gives us the right to sell you US dollars at $1.5600, and obliges
you to buy at that rate. This is the best possible scenario.
Outcome 2
If the GBP / USD rate is below $1.5000, you will exercise your
right to buy USD at $1.5000. This is the rate you have budgeted
for and also your worst case scenario.

Collar Options Outcome 3

If the GBP / USD rate is between $1.5000 and $1.5600, both
A simple example of a zero cost Option is known as a Collar options would expire worthless and you would deal at the prevailing
Option. Imagine a simple Vanilla Option giving you the right to sell spot rate. This is a better deal than you have budgeted for.
GBP and buy USD at $1.5000 in three months’ time. The spot rate is

Please refer to the Product Disclosure Statement for information on all of our option structures. This can be found at:
https://business.westernunion.com/en-gb/About/Compliance-Legal

1. A measure of executed volatility defined by the options market.

2. Note: Western Union Business Solutions does not take positions in the market or against its clients. We match any trade you place with us with one of our counterparty banks. We do not make
a loss if the rate is below $1.5000, or a profit if the rate is above $1.5600. Please refer to our Financial Services Guide, which is available on our website or on request from your Corporate
Hedging Manager, for an explanation of how we make our money.

© 2019 Western Union Holdings, Inc. All rights reserved.

Western Union Business Solutions is a business unit of the Western Union Company and provides services in the UK through Western Union’s wholly-owned subsidiary, Western Union
International Bank GmbH, UK Branch (WUIB). WUIB (Branch Address: 131 Finsbury Pavement, London, EC2A 1NT) is a branch of Western Union International Bank GmbH (registered in
Austria, company number FN256184t, VAT Number ATU61347377, with its registered office at Schubertring 11, 1010 Vienna, Austria), which is licensed by the Austria Financial Market
Authority (Österreichische Finanzmarktaufsicht). WUIB is subject to limited regulation by the UK Financial Conduct Authority and Prudential Regulation Authority. Details about the extent
of WUIB’s regulation by the Financial Conduct Authority and Prudential Regulation Authority are available from WUIB on request.
This brochure has been prepared solely for informational purposes and does not in any way create any binding obligations on either party. Relations between you and WUBS shall be
governed by the applicable terms and conditions. No representations, warranties or conditions of any kind, express or implied, are made in this brochure. All other logos, trademarks, service
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