Front Fee

AAA

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.

INVESTOPEDIA EXPLAINS 'Front Fee'

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).

RELATED TERMS
  1. Back Fee

    A payment made to the writer of a compound option in the case ...
  2. Compound Option

    An option for which the underlying is another option. Therefore, ...
  3. Exercise

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

    1. The total cost of an option. 2. The difference between the ...
  5. Multibank Holding Company

    A company that owns or controls two or more banks. Mutlibank ...
  6. Short Put

    A type of strategy regarding a put option, which is a contract ...
Related Articles
  1. Exotic Options: A Getaway From Ordinary ...
    Options & Futures

    Exotic Options: A Getaway From Ordinary ...

  2. Market Volatility Strategy: Collars
    Options & Futures

    Market Volatility Strategy: Collars

  3. Getting To Know The
    Options & Futures

    Getting To Know The "Greeks"

  4. Options Basics Tutorial
    Options & Futures

    Options Basics Tutorial

Hot Definitions
  1. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  2. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  3. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  4. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  5. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  6. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
Trading Center