Foreign Exchange Option

Foreign Exchange Option Meaning:
In foreign exchange terminology, a foreign exchange 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. They 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 trade on the Chicago IMM and Philadelphia Stock Exchanges.

Foreign Exchange Option Example:
A foreign exchange option can be used by a company looking to hedge or protect against a rise in the U.S. Dollar against their country’s currency. They could do so by purchasing a U.S. Dollar Call/currency Put option. On the other hand, a speculator might purchase such an option if they wished to hold an extended long position in the U.S. Dollar against that currency because they believed that the U.S. Dollar would rise.