Front Fee


DEFINITION of 'Front Fee'

The option premium paid by an investor upon the initial purchase of a compound option. A compound option is one where the underlying asset is also an option (i.e. an option on an option). The front fee gives the investor the right - but not the obligation - to exercise the compound option. If exercised, another fee known as the "back fee" is payable for the underlying option.


Compound options are used in situations where uncertainty exists regarding the requirement for risk mitigation. For example, a company may submit a bid for an overseas project. If successful, the project would generate significant revenue in a foreign currency, which may need to be hedged against exchange rate risk. A compound option would be useful in this case, because the front fee payable would be lower than the premium payable on a foreign currency option contract (which is a contingent liability in any case).

  1. Compound Option

    An option for which the underlying is another option. Therefore, ...
  2. Premium

    1. The total cost of an option. 2. The difference between the ...
  3. Exercise

    To put into effect the right specified in a contract. In options ...
  4. Back Fee

    A payment made to the writer of a compound option in the case ...
  5. Put-Call Parity

    A principle that defines the relationship between the price of ...
  6. Maturity

    The period of time for which a financial instrument remains outstanding. ...
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  3. How does a forward contract differ from a call option?

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