A foreign exchange (Forex) or currency option contract gives the buyer the right, but not the obligation, to buy (or sell) a specified amount of one currency for another at a specified price on (in some cases, on or before) a specified date.
Options are unique in that the right to execute will be exercised only if it is in the holder’s interest to do so. That differs from a forward contract, in which the parties are obligated to execute the transaction on the maturity date, and it differs from a futures contract, in which the parties are obligated, in principle to transact at maturity, but that obligation easily can be—and normally is—bought out and liquidated before the maturity or delivery date.
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A call option is the right, but not the obligation, to buy the underlying currency, and a put option is the right, but not the obligation, to sell the underlying currency.All currency option trades involve two sides—the purchase of one currency and the sale of another—so that a put to sell pounds sterling for dollars at a certain price is also a call to buy dollars for pounds sterling at that price. The purchased currency is the call side of the trade, and the sold currency is the put side of the trade.
The party who purchases the option is the holder or buyer, and the party who creates the option is the seller or writer. The price at which the underlying currency may be bought or sold is the exercise, or strike, price. The option premium is the price of the option that the buyer pays to the writer. In exchange for paying the option premium up front, the buyer gains insurance against adverse movements in the underlying spot exchange rate while retaining the opportunity to benefit from favorable movements.
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