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I am a bit lost with understanding the naming used for holding positions in the currency options and their payoffs.

If I want to buy the European option with an amount of x USD (EUR put/ USD call), what is the position I should hold? Is it a long call or a long put?

I would say a long call but then I am confused about the payoff. The rule for exercise at expiration with European options is that the long call is in-the-money:

  • Strike price < Spot price at maturity

How this translates into this situation:

LONG CALL

My strike price = 1.25 EUR/USD

Spot price at maturity = 1.3 EUR/USD

I want to buy 1000 USD.

In this situation, the rule for long call exercise does not make sense (Strike price < Spot price at maturity) because if I buy 1000 USD then at the strike price it is equal to (1000/1.25) = 800 EUR and at the spot rate it is equal to (1000/1.3) 770. This means that it is better NOT to exercise the option when the strike price < spot price and it is better to buy at the spot.

Am I missing something? Why the rule says that the strike price should be less than the spot rate at maturity to exercise long call??

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FOREX Options only trade on one pair. For EUR/USD u can only make options EUR/USD. You can exercise a long call at any given price at maturity. It only makes sense, however, to exercise when you would make money.

  • My question has nothing to do with your answer. – Dozens May 31 at 9:09
  • Your question is why do you need the strike to be below the spot rate – Jake Freeman May 31 at 12:44

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