How Do Banks and Brokers Make Their Money on FX Options and How Much Do They Make?
The FX Options Market is far less transparent and far less competitive than the Deliverable FX Market. Thus, without any competition banks have been taking sometimes very large profit margins out of Option structures. Sometimes as much as 2-3%, which on a $10 million dollar Option accounts to $200,000 to $300,000 in profit. Just like deliverable FX, brokers will buy Options at a specific rate and sell to you at another rate, their profit being the difference. The reason brokers can offer you better pricing is a result of the volumes they transact over the course of the year, economies of scale allow them to improve your price compared to the bank and make their profit in the difference. For Zero Premium Options, brokers will sell their structures to banks, the sale amount being their profit.
On Zero Premium FX Options, better pricing accounts to you achieving a more competitive protection rate (or worse case rate) in addition to greater upside. In order to achieve the best pricing it’s important to create competition in the trade. Make sure you’re bank & broker is aware there is competition on the trade. It’s good practice to have a broker price up the same option structure too as a gauge on the pricing competitiveness. It is easy for your supplier to smudge the transparency if you are comparing different structures, make a choice from the variety of structures open to you and ask a number of provider to price this up to directly compare.
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