The foreign exchange market is the most liquid capital market in the world. According to the latest BIS survey (2010), daily turnover was around USD 4 trillion. This massive, fluid, market has spawned a very significant option sector.

This tutorial focuses on the world of the OTC FX option trader. It covers the basics of these instruments and their pricing. More exotic structures are also examined and the roles of the various market participants are described in detail.

On completion of this tutorial, you will be able to:

- price a simple European-style foreign exchange (FX) option and calculate the spot delta exposure
- hedge the exposures for simple interest rate options
- recognize the effect of volatility smiles on the pricing of most FX options and on the risk exposures of an option trader
- identify the characteristics and uses of the most common exotic FX options
- describe the roles of various participants in the FX option market

1. Options - Introduction to Option Valuation
2. Options - Barrier Options
3. Options - Future Asset Prices & Volatility
4. Options - Replication, Risk-Neutrality, & Black-Scholes
5. Options - Beyond Black-Scholes