What is One-Touch Option?

349 reads · Last updated: December 5, 2024

A one-touch option pays a premium to the holder of the option if the spot rate reaches the strike price at any time prior to option expiration.

Definition

A one-touch option is a type of option where the holder receives a payout if the current exchange rate reaches the strike price at any time before the option expires. This type of option is commonly used in the forex market to help investors lock in profits when a specific price level is reached.

Origin

The one-touch option originated in the 1990s with the development of the financial derivatives market. It was initially widely used in the forex market, providing a straightforward way to hedge against exchange rate fluctuations.

Categories and Features

One-touch options are mainly divided into two categories: call one-touch options and put one-touch options. A call one-touch option pays a fixed amount when the underlying asset price reaches or exceeds the strike price, while a put one-touch option pays when the price falls below the strike price. They are characterized by their simplicity and are suitable for investors with a clear market direction expectation.

Case Studies

Case 1: Suppose an investor buys a call one-touch option on the EUR/USD with a strike price of 1.20. If the EUR/USD exchange rate reaches 1.20 before the option expires, the investor receives the predetermined payout. Case 2: A company purchases a put one-touch option with a strike price of 1.10 to hedge future forex risk. When the exchange rate falls below 1.10, the company receives a payout, offsetting some losses.

Common Issues

Common issues investors face with one-touch options include incorrect market direction predictions leading to option expiration without payout and failure to accurately predict market volatility. Additionally, investors should be aware of the high-risk nature of one-touch options, which can result in total investment loss.

Suggested for You

Interest Rate Future

An interest rate future is a futures contract with an underlying instrument that pays interest. The contract is an agreement between the buyer and seller for the future delivery of any interest-bearing asset.The interest rate futures contract allows the buyer and seller to lock in the price of the interest-bearing asset for a future date.

Historic Pricing

Historic pricing is a unit pricing method used to calculate the value of an asset using the last valuation point calculated. Historic pricing is used when the value of an asset does not update in real time.

Rational Behavior

Rational behavior refers to a decision-making process that is based on making choices that result in the optimal level of benefit or utility for an individual. The assumption of rational behavior implies that people would rather take actions that benefit them versus actions that are neutral or harm them. Most classical economic theories are based on the assumption that all individuals taking part in an activity are behaving rationally.

Discrete Distribution

A Discrete Distribution, also known as a Discrete Probability Distribution, refers to a probability distribution in statistics and probability theory where the random variable can take on a finite or countably infinite number of specific values. Common examples of discrete distributions include the binomial distribution, Poisson distribution, and geometric distribution. In a discrete distribution, each possible value has an associated probability, and the sum of these probabilities is equal to 1. Discrete distributions are widely used in finance, insurance, engineering, and other fields to describe and analyze the probabilities of discrete events. For instance, the number of times a stock price changes, the number of insurance claims, and similar discrete occurrences can be modeled and analyzed using discrete distributions.

White Elephant

A white elephant is something whose cost of upkeep is not in line with its usefulness or value. From an investmentperspective, the term refers to an asset, property, or business that is so expensive to operate and maintain that it is extremely difficult to actually make a profit from it.White elephants also tend to be illiquid assets, meaning they cannot be easily or quickly exchanged or sold for cash without the seller experiencing a significant loss.

Lehman Formula

The Lehman formula is a compensation formula developed by Lehman Brothers to determine the commission on investment banking or other business brokering services. Lehman Brothers developed the Lehman Formula, also known as the Lehman Scale Formula, in the 1960s while raising capital for corporate clients.