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Foreign Exchange

FX Options: Options go mainstream

As customers become increasingly sophisticated in trading FX options, banks and other providers are enhancing electronic offerings to tap new markets

Although electronic trading of spot FX has reached unexpected levels, trading of FX options has in the past been stymied by mispricing disasters and recent changes to accounting standards that require derivative prices to be marked to market. But investor appetite appears to be changing. Recent data from Greenwich Associates indicate that among all types of users, average trading in currency options by investors increased from $4.4 billion in 2003 to $5.7 billion in 2004.

"Last year was all about bringing emerging markets to major currency funds," says Thanos Papassavas, head of currency management at Credit Suisse Asset Management. "This year has been, and will continue to be, about bringing derivatives into the mainstream."

So there's certainly room for more growth in these products. While FX options are concentrated in the over-the-counter market, FX investors are becoming increasingly comfortable with trading these more complex products online. But for FX participants to remain competitive in derivatives, the types of tools and products available must be as efficient and diverse as possible.

UBS and Deutsche Bank have historically led the way in e-commerce, but other banks and non-bank providers have now recognized the need to beef up their offerings and increase the complexity of the options products they offer online.

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