An option which has, like a European option, a fixed expiration date (it can only be exercised at that date), in addition to having fixed call and put currencies and a specified exercise price. However, the variable notional option is unique in the variability of its notional principal– which rises by a specific ratio as the option moves in the money. This ratio is typically determined on the trade date, but can be altered to accommodate a trader’s requirements or expectations. In this respect, the variability ratio can might be set at 7%, implying that a 7% increase in the spot exchange rate would result in a 7% rise in the principal amount.
This option can be used by traders as well as hedgers, as it provide the former with a gearing or leverage ability that allows them to cope with market movements, consequently altering their expectations and strategies. Similarly the latter, especially institutional investors, can fine-tune their currency exposures according to movements in exchange rates.
