Currency options refer to a contract that provides the buyer with the right, but not the obligation, to purchase or sell a specific currency at a pre-decided exchange rate either on or before a specific date. Usually, a seller is paid a premium for this right. The currency options are traded, or bought and sold, on the foreign exchange market. These are popular financial instruments used for hedging or speculating on currency movements.

The types of currency options are given below:

• Currency call: When the price of a currency pair rises, traders purchase currency call options to benefit from the increasing prices. Call options give the buyer the right to purchase the currency pair at a pre-decided strike price. This purchase takes place either on or prior to the contract expiration date. If the currency pair is less than the strike price at the time of expiration, the value of the option will be zero, and the seller will get the premium.
• Currency Put: On the other hand, when the price of currency pair falls, traders buy currency put options to profit from the falling prices. The put option buyer gets the right to sell the currency pair at a pre-decided strike price either on or prior to the expiration of the contract. However, if the currency pair is more than the strike price at the expiry, the option’s value will be zero and it becomes worthless, while the seller will get the premium.

There are various advantages to investing in currency options. They are as follows:

• Investing in currency options provides traders with an opportunity to leverage trades since the cost of the options contract is lower than the cost of actually purchasing the contract. This enables you to take a large position for a smaller premium.
• Currency options trading is also a low-cost hedging strategy used by large companies to protect themselves from unfavourable currency movements.