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. Call On A Call

    A type of compound option in which the investor has the right ...
  2. Put On A Call

    One of the four types of compound options, this is a "put" option ...
  3. Put On A Put

    One of the four types of compound options, this is a put option ...
  4. European Option

    An option that can only be exercised at the end of its life, ...
  5. Options On Futures

    An option on futures gives the holder the right but not obligation ...
  6. Option Premium

    1. The income received by an investor who sells or "writes" an ...
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