Forex Currency Option

Currency options introduction
Options are used within many companies as a forex risk-management tool and are important in that process. Risk managers must have a good understanding of forex currency options as they apply to their unwise position in the forex marketplace. What is a forex option? Simply stated, and option is a choice. The buyer of an option acquires the right but not the obligation to buy or sell and undrlying asset under specific conditions in forex exchange for the payment of a premium. It is entirely up to the buyer whether or not the exercise that right: only the seller of the option is obligated to perform.
In every foreign exchange transaction, one currency is purchased and another currency is sold. Consequently, every currency option is both a call and a put option gives the buyer the right to sell.
An option to buy Australian dollars against U.S. dollars is both and Australian dollar call and a U.S. dollar put. Conversely, an option to sell Australian dollars against U.S. dollar. put and U.S. dollar call. Let's take example a Australian importer who has the obligation in 3 month's time to pay US $1million for a commodity such as soy milk. The importer has a number of alternatives they can do:

• Remain UN-hedged and purchase the U.S. dollars at the prevailing spot rate in 3 months time
• Hedge by buying U.S. dollars forward
• Hedge buy using an option strategy

One of the many strategies available to a importer is to buy an Australian dollar put/U.S. dollar call option. The effect of buying an Australian dollar put is to place a ceiling on the cost of the imports without limiting the potential benefit if the spot rate rises. The importer limits the cost to a maximum while not limiting the minimum.