Currency Options

Currency options also known as forex (FX) options are contracts that give the owner the right and not the obligation to buy one currency against another at a pre-agreed rate on or before a specified date. The seller of the option is contractually obliged to sell the first currency vs the second one to the option holder, should the buyer decide to exercise her rights. The buyer of a currency option pays the seller an option premium to compensate for asymmetry in risks that the two parties are taking.

Currency Call Option is the right and not the obligation to purchase the currency at a specified rate. Currency Put Option is the right and not the obligation to sell the currency at a specified rate. The pre-agreed rate at which the option holder has the right to convert the currencies is called the Strike rate. Similarly, to other financial contracts, the option contract must also have an agreed Notional amount and an Expiry date.  For instance, a GBP call option with a strike of 1.3000 for a GBPUSD 100,000 contract with an expiry date of 23 December 2020 is the right and not the obligation owned by the option holder to purchase from the seller Pounds Sterling 100,000 by paying US Dollars 130,000 on or before the expiry date no matter what the conversion rate will be at that time.