Currency Binary

AAA

DEFINITION of 'Currency Binary'

A currency trade that offers an all-or-nothing payoff based on a given currency exchange rate when the position reaches its expiration date. Binaries have a single payoff amount rather than the variable profit amounts found in traditional options.

Binary trades can be used for either hedging purposes (such as downside protection for assets held in a specific currency) or as a speculative bet on the direction a specific exchange rate will move. The going premium on a currency binary represents the consensus "odds" that the strike exchange rate will be reached by expiration. An investor or trader can also sell (short) a currency binary position, reversing the payoff options and effectively betting that the exchange rate will fall.

INVESTOPEDIA EXPLAINS 'Currency Binary'

Currency binaries represent a rather young trading strategy, and not all currency exchange rates are currently being traded. The majority of positions are for the EUR/USD, GBP/USD and USD/YEN based on their very liquid forex markets.

For example, assume that the exchange rate for the EUR/USD is currently 1.25; an investor who buys a currency binary at a strike exchange rate of 1.30 is betting that the exchange rate will be 1.30 or greater on the expiration date. If this occurs, the investor will receive a set payoff amount, no matter how far above 1.30 the exchange rate settles. If the exchange rate at expiration is less than 1.30, the long investor receives nothing.

RELATED TERMS
  1. Euro

    The official currency of the European Union's (EU) member states. ...
  2. Hedge

    Making an investment to reduce the risk of adverse price movements ...
  3. Single Payment Options Trading ...

    A type of option product that allows an investor to set not only ...
  4. Digital Option

    An option whose payout is fixed after the underlying stock exceeds ...
  5. Currency Option

    A contract that grants the holder the right, but not the obligation, ...
  6. Forex - FX

    The market in which currencies are traded. The forex market is ...
Related Articles
  1. Options & Futures

    A Primer On The Forex Market

    Moving from equities to currencies requires you to adjust how you interpret quotes, margin, spreads and rollovers.
  2. Forex Education

    Currency Exchange: Floating Rate Vs. Fixed Rate

    Baffled by exchange rates? Wonder why some currencies fluctuate while others are pegged? This article has the answers.
  3. Forex Education

    Forex: Wading Into The Currency Market

    We go over the ground rules and available resources needed for this undertaking.
  4. Forex Education

    Top 7 Questions About Currency Trading Answered

    Whether you're puzzled by pips or curious about carry trades, your queries are answered here.
  5. Options & Futures

    Options -- Accessing Stakes In Apple At Less Cost

    Finding Apple stock costly to trade? Here are multiple ways to trade it through low-cost Apple options.
  6. Investing Basics

    The Strange New World Of The Bitcoin Exchange Futures Market

    We explain the basics of the Bitcoin exchange and futures market.
  7. Options & Futures

    These Are The Top Brokerage Firms For Options Trading

    Trading options? Here is the list of the best brokerage firms for options trading, with features, functionality, and brokerage rates.
  8. Fundamental Analysis

    What are the most common issues with Serial Correlation in stocks?

    Read about the concept of serial correlation in stock returns, and learn why market analysts are divided about the efficacy of trading based on stock patterns.
  9. Forex Strategies

    How do I create a Forex Range-Bound trading strategy?

    Discover how to create a range-bound trading strategy with forex currency pairs, and learn which kinds of pairs are most conducive to ranges.
  10. Options & Futures

    What is a volatility smile?

    Discover what options traders mean when they refer to a "volatility smile," and learn why a volatility smile's existence perplexes many investors and analysts.

You May Also Like

Hot Definitions
  1. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
  2. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
  3. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  4. Break-Even Analysis

    An analysis to determine the point at which revenue received equals the costs associated with receiving the revenue. Break-even ...
  5. Key Performance Indicators - KPI

    A set of quantifiable measures that a company or industry uses to gauge or compare performance in terms of meeting their ...
  6. Bank Guarantee

    A guarantee from a lending institution ensuring that the liabilities of a debtor will be met. In other words, if the debtor ...
Trading Center