Currency Options : As you have learnt the forward contract protects the interest of the holder against the risk of adverse movements in exchange rates. At the same time, the contract eliminates the possibility of gaining a windfall profit from favourable movements. Thus led the commercial banks to introduce the Currency Options. In currency options or option forward the rate of exchange between the two currencies is fixed at the time the contract is entered into as in a forward contract but the delivery date is not fixed. What is an Option '? An option is a financial contract that gives the holder the right but not the obligation to sell or buy the financial instrument at a set price and expiration date. When holder has the right to sell the financial instrument, it is termed as put option. On the other hand, when the holder has the right to buy the financial instrument, it is termed as call option.
An option that would be profitable to exercise at the current exchange rate is termed as in the money. An option that would not be profitable to exercise at the current exchange rate is termed as out-of-the-money. The price which the option is exercised is called the strike price or exercise price. An option whose exercise price is the same as the spot exchange rate