Currency Options

Currency options contract gives the buyer the right but not the obligation, to buy or sell the currency at a specified exchange rate on or before the expiration of the contract. Currency options market is the largest and the most liquid compared to any other options market. Currency options are generally traded over-the-counter (OTC). Traders can choose a particular price and expiration date till which the contract will be valid and then they receive a quote stating the premium to be paid to acquire that option. Currency options are best for multi-national organizations that seek protection against exchange rate fluctuations.

Consider an example, suppose a trader purchases an option to buy two lots of EUR/USD at 1.30 in one month. If the price of EUR/USD is below 1.30, the option expires worthless, and the buyer loses only the premium. On the other hand, if EUR/USD rises above 1.30, then the buyer can exercise the option and gain two lots for only 1.30 instead of the increased price in the market.