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Glossary

Currency option bonds

Category — Bond Option Types
The currency option bond is a security that provides for the possible return of par and the payment of coupons in several currencies. The holder of a currency option bond can choose the currency in which they would like to receive coupons and par.

The advantage of currency option bonds:

A currency option bond allows investors to hedge against currency risk. To compensate for the reduced risk, the interest rate on such a currency option bond will always be lower than the interest rate on any of the single currency issues denominated in the currencies that make up the currency option bond.

The exchange rate and coupon rate are fixed at the time the bond is issued. For example, the exchange rate can be defined as $1 = £0.80 over the life of the bond. In such a situation, if the dollar begins to depreciate against the pound, then the investor will prefer to receive coupons in pounds rather than US dollars, and vice versa if the dollar strengthens.

In practice, currency option bonds available to retail investors often have short maturities.
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