In foreign exchange terminology, a Currency Option is a contract that confers upon its buyer the right, but not the obligation, to enter into a foreign exchange contract at a particular price and date in the future for a price known as the premium. Such options are usually specified by their currency pair, strike price, expiration date, direction and amount. Most currency options traded are customized contracts dealt in the over-the-counter forex market, although standardized forex options also trade on the Chicago IMM and Philadelphia Stock Exchanges.
A Currency Option can be used by corporations looking to hedge or protect against a rise in the U.S. Dollar against their base country’s currency. They could do so by purchasing a U.S. Dollar Call/currency Put option. On the other hand, speculators who believe that the U.S. Dollar would appreciate against another currency over the medium-term, might buy such a Currency Option if they wished to maintain a long position in the U.S. Dollar against that currency and avoid being stopped out.