A contract that grants the holder the right, but not the obligation, to buy or sell currency at a specified exchange rate during a specified period of time. For this right, a premium is paid to the broker, which will vary depending on the number of contracts purchased. Currency options are one of the best ways for corporations or individuals to hedge against adverse movements in exchange rates.
Investopedia Says:
Investors can hedge against foreign currency risk by purchasing a currency option put or call. For example, assume that an investor believes that the USD/EUR rate is going to increase from 0.80 to 0.90 (meaning that it will become more expensive for a European investor to buy U.S dollars). In this case, the investor would want to buy a call option on USD/EUR so that he or she could stand to gain from an increase in the exchange rate (or the USD rise).
Related Links:
Knowing the relationships between pairs can help control risk exposure and maximize profits. Using Currency Correlations To Your Advantage
Tap into a world of possibilities by going beyond the simple pro- or anti-dollar trade. Make The Currency Cross Your Boss
An introduction to the world of options, covering everything from primary concepts to how options work and why you might use them. Options Basics Tutorial
Copyright ©2010, Investopedia.com - Owned and Operated by Investopedia US, A Division of ValueClick, Inc. All rights reserved.
