Currency Options

Forward contracts as well as futures (‘(~entrant~ provide a hedge In firms again~t adverse movements in exchange rates. This is the  ajor advantage of such fin  I II”~’ documents. However, at tho.: same  time, these contracts deprive firms of a chance to ;1\;111  ill’  )cndits that Allay ~strut’ due 10  L”‘tolerable move merits in further(n exchange rates. The achoo for this is that the firm is under obligation to buy or sell currencies :II pre-determined rates. This limitation of These contrasts is the  main reason Jor the gcnc« of currency options in lorex markets. _  Currency option s a financial instrument that provides its holder a  igbt hI/I I1U “”‘igat/”t’ 10  bl/y or ,~II a pre-specified AL/1()/1/1 0/ a foreign UlfT SIC\’ at (/ pro-determined rate -in the /1/1l’  Oil a fixed maturity date/upto a certain period). While the buyer of an option wants to avoid the risk of  adverse changes in  exchange rates. the sc’lJer of the option is prepared to assume the risk. Options  are .of two types. namely. call option and’ put   ption,

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