What is a Currency Option?

A currency option is a derivative contract that gives the buyer of the option the right, but not the obligation, to buy or sell the currency at a specific time and at a predetermined price. The seller of the contract is obliged to fulfil the contract if the contract is exercised. The dynamics and mechanism of currency option trading are very similar to equity options.

Currency options are used to minimize risk, speculate on currency fluctuations, and hedge international transactions. They offer the opportunity to benefit from favourable currency developments and to protect against adverse changes.