A compo option that gives the holder the right to trade a foreign equity, with a strike denominated in the base currency, though the option itself is structured on a foreign, not local, exchange. For example, a call option entails, upon exercise, the delivery of a specified number of foreign shares. This option, therefore, is a foreign exchange (FX) option that places a floor on the currency risk an investor is exposed to. Because of this floor, the investor is fully protected against the risk of foreign currency exchange, but, notwithstanding, is still exposed to the downside risk associated with foreign assets. This downside risk results from the potential rise and fall of the foreign shares.
This option is known for short as elf-x option.
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