Definition – What does Foreign Exchange Option mean?
A forex option is a financial contract that gives the owner the right to exchange one currency for another at an agreed upon exchange rate and specific date. The owner of the option is not obligated to use (exercise) the option.
A foreign exchange option is also referred to as a fx option, forex option or currency option.
ForexTerms explains Foreign Exchange Option
Forex options are used by investors, traders, banks, businesses and so on. Some market participants use them to hedge against currency risk and others use them purely for profit.
A forex option is a derivative in that it derives its value from the price action in the currency pair it is written for. For example, if the option is for $10,000 CAD to be exchanged for $97,000 USD and the U.S. dollar falls in value against the Canadian dollar during the time the option is active, then the option gains value.