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Chapter 13

Currency options

Options give the right but not the obligation to buy or sell currency at some point in
the future at a predetermined rate.

A company will therefore:

 exercise the option if it is in its interests to do so (if the rate has moved
unfavourably), or

 let the option lapse (if the rate has moved favourably or of there is no longer a
need to exchange currency)

Options provide extra flexibility – the opportunity to take advantage of favourable rate
movements, but they come with a cost – a premium paid up front and spent whether
the option is exercised or not.

Options may be:

 put – the right to sell currency at a particular rate

 call – the right to buy currency at a particular rate

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