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:
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??