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FXBoxOption - Overview

Professionals and amateurs follow price movements in the foreign currency exchange market with great interest. But trading currencies for speculative or hedging purposes requires a detailed understanding of market workings and involves significant risk.

Until now!

OANDA FXBoxOption is a unique new service which breaks away from the limitations and complexities traditionally associated with options trading. Novel features include:

• The customer defines the option
• Intra-day options for time periods as short as 5 minutes, as well as longer-term options (multi-week) can be defined.
• The payout is calculated dynamically on-the-fly based on the customer's definition
• Losses are limited to the purchase price of the option.
• A simple graphical user interface, makes BoxOption trading intuitive. Everyday forex traders can now buy and sell complex structured products that have previously been available only to super-sophisticated institutional investors.
  

BoxOption is fully integrated into OANDA's pioneering FXTrade currency trading platform. The trader uses the cursor to draw boxes around expected price targets or resistance or support levels, request an instance price quote from OANDA and then buy or sell the option at their discretion. The ease of use of BoxOptions opens a new era in options trading.

What is a BoxOption?

A BoxOption is a customer-defined option that is an exotic cross between a binary option and a corridor option. The following steps illustrate how BoxOptions work:

1. Customer-defined option: The customer defines the option by drawing a square "box" in an area of the price graph that lies in the future, where the customer believes the price will go (and the graph will ultimately "hit" or touch the box).
2. Dynamic payout calculation: The BoxOption system then calculates the payout associated with the box if the box is successful and displays this to the customer. The payout is determined by the size and position of the Box: the lower the probability the box will be hit, the higher the payout.
3. Purchase decision: Based on the payout displayed, the customer decides how much she wishes to invest in the option, if at all.
4. Payout: If the exchange rate later hits or touches the box, then the customer receives the fixed payout for each $1 invested. She receives no payout if the price "misses" the box.

In the scenario above, BoxOptions were defined and bought with the aim of having the price hit the box. It is also possible to define and buy BoxOptions with the aim of having the price miss the box.

Who is the BoxOption service targeted at?

The service is primarily targeted at both professional and private investors wishing either to hedge their positions or to diversify their portfolios with an alternative form of investment.

What can BoxOptions be used for?

BoxOptions can be used for a variety of purposes. For example:

• For hedging exchange rate risk
• For hedging a currency position
• As a medium-term speculative instrument
• To achieve high-investment gearing.

Does a BoxOption represent a true option?

No. Each BoxOption represents an individual agreement between the customer and OANDA Corporation. BoxOptions cannot be exchanged or traded independently, and they are not standardized. However, they are similar to options in that their pricing (i.e., payout) is calculated based on option pricing theory, and in that the downside risk is limited to the purchase price.

How do BoxOptions differ from currency trading?

In theory, it is possible to enter into a position of the underlying currency pair and achieve a similar payout. However, there are some distinct differences:

• With BoxOptions, the maximum loss is the price of the box, whereas when trading with the underlying currency pair, the maximum loss can be much greater and would normally need to be constrained with stop-loss orders.
  
• With BoxOptions, you can adopt a long-term position without the need for any stop-loss orders. In the case of a trend in the wrong direction followed by a trend reversal in the right direction, a position in the underlying may bail out early if the stop-loss threshold is reached.
  
• BoxOptions provide higher potential investment leverage: a box costing $1 can quite typically correspond to a position in the underlying of about $1,000. Trading the underlying would therefore require significantly more capital for the same return.

How risky are BoxOptions?

Transactions in BoxOptions carry a high degree of risk. Purchasers of BoxOptions should familiarize themselves with the type of BoxOptions (i.e., hit or miss) which they contemplate purchasing and the associated risks. The purchaser of BoxOptions may offset the BoxOptions or allow the BoxOptions to mature. If the purchased BoxOptions mature worthless, you will suffer a total loss of your investment. If you opt to offset your BoxOptions prior to maturity, you may none-the-less experience a loss, up to and including a total loss of your investment. If you are contemplating purchasing deep-out-of-the-money BoxOptions, you should be aware that the chance of such BoxOptions becoming profitable ordinarily is remote.