Currency Call Options

Currency call option definition

A currency call option is a contract that gives its buyer the right to purchase a certain amount of currency at a specified exchange rate on or before the date specified in the contract. European-style currency call options can only be exercised on the specific date listed on the contract, while American-style options are valid on any date up to and including the expiration date. Essentially, the purchaser of a foreign currency call option is betting that the price of the currency will increase over its current rate, and that the investor will be able to buy the currency at the lower rate and immediately sell it for the higher amount currently paid on the international FOREX market, making a profit on the overall transaction.

Currency call option advantages

In the international FOREX market, domestic and foreign currency call options allow investors and companies to profit from upturns in the value of a given currency without acquiring a large position in those currencies; this can allow companies to hedge their investments to ensure that they are protected against large movements in foreign currencies. For instance, a U.S. company that is expecting a large payment in U.K. pounds may wish to purchase a currency call option for dollars for the date of the payment. This protects the company against the possibility that the pound may decrease in value before the expected date of payment, since the company has the right to purchase dollars with pounds at the current rate of exchange. If pounds increase in value relative to dollars, the company can simply allow the contract to expire without exercising its currency call option; either way, it is covered against unexpected movements in the relative values of the two currencies in question.

Currency option market

Currency options of all varieties, including currency call and put options, are traded on the international FOREX market, the options market with the highest liquidity and volume. Most currency options are traded over the counter rather than through an exchange; this avoids costs associated with intermediaries, but lessens the amount of regulation possible for these transactions as well.