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Currency Options

In: The Exporter’s & Importer’s Handbook on Foreign Currencies

Author

Listed:
  • A. D. P. Edwards

Abstract

This kind of option should not be confused with the ‘option’ period contained in a forward contract which provides days of grace for delivery or taking up delivery of currency. It is a relatively new facility now available in the City of London. The benefit of a currency option against selling currency forward or buying currency forward is that it gives the purchaser of the option the right, but not the obligation, to buy or sell currency at a fixed rate on or before the agreed date. This enables a trader to fix a rate of exchange at some time in the future, up to twelve months normally, and gives him the option of taking up that exchange rate if the current spot rate has gone against him. On the other hand, if the current spot rate has gone in his favour he does not have to meet any obligations as he would under a forward contract, but merely does not take up the option although of course he has had to pay the fee known as the premium but again not to be confused with the premium arising from a forward contract.

Suggested Citation

  • A. D. P. Edwards, 1990. "Currency Options," Palgrave Macmillan Books, in: The Exporter’s & Importer’s Handbook on Foreign Currencies, chapter 10, pages 53-56, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-349-11852-6_11
    DOI: 10.1007/978-1-349-11852-6_11
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