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. Compound Option

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

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

    1. The total cost of an option. 2. The difference between the ...
  4. Back Fee

    A payment made to the writer of a compound option in the case ...
  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 FAQS
  1. My brokerage firm won't allow naked option positions. What does this mean?

    A naked position refers to a situation in which a trader sells an option contract without holding a position in the underlying ... Read Full Answer >>
Related Articles
  1. Options & Futures

    Exotic Options: A Getaway From Ordinary Trading

    Exotic options are like regular options, except that they have unique features that make them complex. These unusual investment vehicles can reignite your interest in trading.
  2. Options & Futures

    Market Volatility Strategy: Collars

    Find out which protective or bullish collar will result in your optimal risk/return level.
  3. Options & Futures

    Getting To Know The "Greeks"

    Understanding price influences on options positions requires learning about delta, theta, vega and gamma.
  4. Options & Futures

    Options Basics Tutorial

    Discover the world of options, from primary concepts to how options work and why you might use them.
  5. Options & Futures

    An Option Strategy for Trading Market Bottoms

    The reverse calendar spreads offers a low-risk trading setup that has profit potential in both directions.
  6. Options & Futures

    The ABCs Of Option Volatility

    The mystery of options pricing can often be explained by a look at implied volatility (IV).
  7. Options & Futures

    Get To Know These Crucial US Options Market Regulations

    How are options regulated in the U.S and which organizations are involved in options market regulations?
  8. Options & Futures

    Give Yourself More Options With Real Estate Options

    Real estate options have many benefits, including a smaller initial capital requirement.
  9. Options & Futures

    The Fancy Way To Diversify Your Portfolio: Precious Metal Options

    A guide with strategies on how to invest or trade in precious metals by using options.
  10. Options & Futures

    When And How To Take Profits On Options

    Here are the different criteria to ensure maximum profit taking while trading options.

You May Also Like

Hot Definitions
  1. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  2. Subsidy

    A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy ...
  3. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
  4. Technical Skills

    1. The knowledge and abilities needed to accomplish mathematical, engineering, scientific or computer-related duties, as ...
  5. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received ...
  6. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
Trading Center