Currency Option Definition

A currency option is a type of derivative that gives the holder the right, but not the obligation, to buy or sell a certain currency at a set price on or before a certain date. Currency options are used by investors as hedges against adverse movements in exchange rates.

Currency options contracts are traded on over-the-counter markets and on some exchanges, such as the Chicago Mercantile Exchange. The contracts are standardized in terms of the underlying currency pair, delivery date and strike price. The most common type of currency option is the plain vanilla call or put option, which gives the holder the right to buy or sell a specified amount of foreign currency at a specified price (the strike price) on or before a specified date (the expiration date).