Investments, tenth edition

  Foreign Currency Options 

  

A currency option offers the right to buy or sell a 

quantity of foreign currency for a specified amount of domestic currency. Currency 

option contracts call for purchase or sale of the currency in exchange for a specified num-

ber of U.S. dollars. Contracts are quoted in cents or fractions of a cent per unit of foreign 

currency. 

 There is an important difference between currency options and currency  futures   options. 

The former provide payoffs that depend on the difference between the exercise price and 

the exchange rate at expiration. The latter are foreign exchange futures options that provide 

payoffs that depend on the difference between the exercise price and the exchange rate 

 futures price  at expiration. Because exchange rates and exchange rate futures prices gener-

ally are not equal, the options and futures-options contracts will have different values, even 

with identical expiration dates and exercise prices. Trading volume in currency futures 

options dominates trading in currency options.  

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  Options Markets: Introduction 

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