What are Currency Options?
In finance, currency options are financial instruments which give their owner the right, but not the obligation, to exchange money from one currency to another at an agreed-upon exchange rate on a certain date. The broker is paid a premium for this right, which can vary. The premium depends on the number of contracts purchased. Currency options are an excellent way for corporations and individuals to hedge against unexpected movements in exchange rates. Currency options are also called foreign exchange options. Someone who invests in foreign currencies can hedge his risk by buying a currency option in the form of a put or call. For example, if an investor believes that the U.S. Dollar will become more expensive in terms of the European Euro, he would buy a call option in an attempt to profit from the rise in the relative value of the Dollar. If, on the other hand, he thinks that the U.S. Dollar will become cheaper in terms of Euros, he would be wise to buy a put option, which would all
Currency options, simply states, are a choice. It gives the buyer the option to the right, but not obligation, to enter into a contract or buy or sell an underlying asset. The option owner general will exercise this right to their advantage. The seller is the only part obligated to act upon request to fulfill the contract. Currency options determine a foreign exchange contract, and give the owner the option, or right, to enter into the specified contract during a pre-determined period of time. Corporate Treasury managers have accepted currency options as invaluable tools for managing the risk of foreign exchange. The risk in purchasing a currency option is much lower than a currency futures contract, as it is limited to the premium, which you pay without the unlimited risk potential of a currency futures contract. How are Currency Options Valued? There are several important components that make up the option premium (price) that you should understand. The elements that are used in the
