DEFINITION of 'Equity Linked Foreign Exchange Option - ELF-X'

A put or call option that protects an investor from foreign-exchange risk for a future sale or purchase of a specified foreign-equity portfolio.

BREAKING DOWN 'Equity Linked Foreign Exchange Option - ELF-X'

ELF-X options are a combination of a currency option and an equity forward contract. Should the exchange rate work in the investor's favor under the option contract, the total payout from the option is dependent upon the performance of the equities underlying the contract. Otherwise, the investor does not receive a payout.

For example, if an investor holds an ELF-X call option on USD relative to CAD, and the Canadian dollar depreciates relative to the American, the investor would not receive a payout. However, if USD depreciated relative to CAD, the investor would receive the amount saved from use of the spot exchange rate in the option contract and the foreign-equity portfolio value, less the premium paid for the call option. Also known as a "portfolio currency protection option" or PCPO.

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