A currency option is a financial contract that gives the buyer the right, but not the obligation, to buy or sell a specific currency at a predetermined exchange rate (strike price) on or before a specified expiration date. Call options give the right to buy, while put options give the right to sell. The buyer pays a premium for this right, and currency options are widely used by businesses and traders to hedge foreign exchange risk or speculate on currency movements.
Example
“An exporter buys a EUR/USD put option with a strike price of 1.0800, paying a $2,000 premium. If the euro falls below 1.0800, the option allows them to sell euros at the higher strike price, limiting their downside exposure.”