FX Options

FX Options are financial derivatives that give the holder the right, but not the obligation, to exchange one currency for another at a predetermined exchange rate (known as the strike price) on or before a specific date in the future. They are commonly used by companies, investors, and financial institutions to hedge against foreign exchange risk.

There are two main types of FX options: call options and put options.

• A call option gives the holder the right (but not the obligation) to buy a specific amount of one currency (the base currency) using another currency (the quote currency) at a predetermined exchange rate (strike price) before or at the option’s expiration date.

• A put option gives the holder the right (but not the obligation) to sell a specific amount of one currency in exchange for another at a predetermined exchange rate (strike price) before or at the option’s expiration date.

1. Strike Price:
   • The exchange rate at which the holder can buy or sell the currency under the terms of the option.

1. Expiration Date:
   • The date by which the holder must exercise the option if they choose to do so. FX options can be European-style (exercised only on the expiration date) or American-style (exercised at any time before or on the expiration date).

1. Premium:
   • The cost or price of the option, paid upfront by the buyer to the seller. This is similar to an insurance premium. The buyer of the option can decide not to exercise it if it's not profitable (but the premium will not be refunded).