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.
BREAKING DOWN '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.