Option (FX Option)

An option — in the context of foreign exchange — is a contract that gives the buyer the right, but not the obligation, to buy or sell a currency at a pre-agreed rate (strike price) on or before a specific future date.

Unlike a forward contract, an option does not have to be exercised if the market moves favourably — giving businesses flexibility and downside protection at the cost of an upfront premium.

Example:

A UK company buys a EUR call / GBP put option to purchase €500,000 at 1.17 in three months.

If the market moves to 1.15 (worse for the buyer), the company exercises the option and locks in 1.17.

If the market improves to 1.20, the company lets the option expire and buys euros at the better rate.

Used in:

FX hedging, risk management, and treasury strategies where flexibility is preferred over fixed-rate commitments.