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Product features
A binary currency option (BCO) is a derivative financial instrument in which the buyer receives a fixed amount at maturity if a specific condition is met—the exchange rate reaches or does not reach a certain barrier.
The barrier can be of two types:
- If the barrier is reached during the option term (one touch) – the buyer receives the fixed amount at maturity.
- If the barrier is not reached (no touch) – the option does not pay out.
Two-barrier options are also possible, where the option is activated or deactivated depending on the movement of the price within a predefined range.
Factors affecting the value of currency option premiums
- Spot rate of the FX pair of the option: The biggest influence on the value of the option is the spot rate of the FX pair and the volatility of the exchange rate.
- Type and level of barrier(s) (one touch, no touch): The clients of the bank can also make profit if by the maturity of the option one touch barrier is reached or no-touch barrier is not reached.
- Interest rates on each of the currencies in the FX pair: In cases when the client wants to make a profit, he/she can buy an option at a certain premium (price) and sell it back at a higher premium.
- The volatility of the FX pair exchange rate: Based on their expectations about the FX rate and the volatility, the clients of the bank can use Binary FX Options to realize income from trading them.
- The time to the maturity of the option: Ability for the customer to fix a maximum amount of negative result when buying Binary FX Options, i.e. to lose the entire invested amount.
Target market of the product
A binary currency option is a financial instrument that the bank creates and distributes as a product. As of July 2, 2018, the European Securities and Markets Authority (ESMA) introduced a ban on the marketing, distribution, or sale of binary options to retail investors (non-professional clients). The table below sets out the criteria for determining which clients the product is suitable for and which it is not.
| Positive | Negative | |
| Type of clients | Professional and eligible counterparties | - |
| Clients’ knowledge and experience | - Regarding the FX markets, functioning and factors affecting movements - The movement and potential expectations on the hedged FX pairs - The product FX option - rights, obligations, parameters affecting the value of the currency option - Hedging the currency exposure by entering FX option - The possible maturity scenarios of the currency option | Does not meet the indicated knowledge and experience requirements |
| Clients’ financial situation with a focus on the ability to bear losses | To fix a maximum amount of negative result when buying a currency option | - |
| Clients’ risk tolerance and compatibility of the risk | If the objective is hedging, the client's risk appetite will not be considered. In other cases, the client's risk appetite should be high (risk category 7 of 10) | Inclined to bear the risks of negative deviations of the respective FX pair in case the client's objective is to hedge. In cases the objective is speculation - when it is not inclined to bear the risks of negative movements of FX pairs |
| Clients’ objectives and needs | To hedge or to provide liquidity | - |
Contact dealers:
Deyan Mankovski – Head of the Treasury Sales Department– 02 80 10 862
Kalina Mays – Head of FX Department, Treasury Sales Department – 02 97 66 233
Milena Lukanova – Senior Dealer, Treasury Sales Department – 02 97 66 232
Hristo Arnaudov – Dealer, Treasury Sales Department – 02 93 91 364
Stoyan Georgiev – Senior Dealer, Treasury Sales Department – 02 93 91 130
Hristo Sugarev – Dealer, Treasury Sales Department – 02 93 91 133
Ivelin Ivanov – Senior Dealer, Treasury Sales Department – 02 93 91 365
Martin Georgiev – Dealer, Treasury Sales Department – 02 97 66 234
