A foreign currency option is a contract giving the option purchaser (the buyer) the right, but not the obligation, to buy or sell a given amount of foreign exchange at a fixed price per unit for a specified time period (until the maturity date). The most important phrase in this definition is “but not the obligation”; this means that the owner of an option possesses a valuable choice.
There are two basic types of options: calls and puts. A call is an option to buy foreign currency, and a put is an option to sell foreign currency.
There are two basic types of options: calls and puts. A call is an option to buy foreign currency, and a put is an option to sell foreign currency.
Every option has three different price elements: 1) the exercise or strike price, the exchange rate at which the foreign currency can be purchased (call) or sold (put); 2) the premium, the cost, price, or value of the option itself; and 3) the underlying or actual spot exchange rate in the market.
An American option gives the buyer the right to exercise the option at any time between the date of writing and the expiration or maturity date. A European option can be exercised only on its expiration date, not before.