What is currency option?

A currency option provides you with a right tool but not the obligation to buy or sell currency at a specified rate on a specific future date. In exchange for this right the holder usually pays the cost that is known as the premium for the currency option. Currency market fluctuations can have a lasting impact on cash flow, whether it is buying a property, making an investment, or settling invoices. By utilizing Forex options, businesses can protect themselves against adverse movements in exchange rates.

This feature of Forex options makes them extremely useful for hedging forex risk when the direction of the movements in exchange rates is uncertain. Forex options are also useful tools which can be easily combined with Forex Futures to create bespoke hedging strategies. Forex options can be used to create bespoke solutions and work to remove the uptrend cost of a premium.This involves certain caveats around the structure of the option product.

Now, let us understand some basic terminologies of Forex options:

Premium

The upfront cost of purchasing a currency exchange option is called the premium.

Strike price

The strike or exercise price is the price at which the option holder has a right to buy or sell a currency.

Expiry date

The trades expiry date is the last date on which the rights attached to an option may be exercised.

Exercise

The act of the option buyer notifying the seller that they intend to deliver on the option contract is called exercise.

Delivery date

The date when the currency exchange will take place if the option is exercised.