What is a foreign exchange option? | finder.com
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What is a foreign exchange option?

A foreign exchange option — also known as an FX option or currency option — is a type of foreign exchange derivative. It’s all about giving you more flexible opportunities in the future and protecting you from unfavorable fluctuations in the exchange rate.

What is a foreign exchange option?

Just like its name implies, a foreign exchange option gives you the option to buy or sell an amount of money in one currency for another currency. You can exercise this option at a specified exchange rate up until an agreed-on date in the future.

When you buy the right to an option, you pay a fee to the seller of that option (called a premium). If you acquire the right to buy a currency, you have a call option. If you acquire the right to sell a currency, you have a put option.

Why is a foreign exchange option useful?

You can use a foreign exchange option to protect yourself if exchange rates move against you.

Among the advantages of an option is its flexibility — it doesn’t force you to buy or sell currency. If exchange rates are unfavorable, you can choose not to exercise your option and simply lose the premium you paid to the seller of the option.

Foreign exchange options: An example

Let’s say you need to pay your overseas supplier 5.5 million yen (a little under $50,000) in five months. The dollar-to-yen exchange rate is great right now, but you don’t want to exchange your money and sit around with a bunch of yen for months.

What you can do is put a call option on the yen — one that gives you the right to buy the currency in five months at the current exchange rate. If the dollar weakens against the yen (it other words, if it buys you fewer yen), you can exercise your option. If the dollar strengthens against the yen, even better — you can simply lose the premium you paid for the option and buy yen at a superior price.

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Compare up to 4 providers

I want to send

to

Enter your details to speak to a foreign exchange expert

By submitting this form, you agree to finder.com privacy policy
Ofx Logo

Save money on your personal or business international money transfer today. Fill in the form and you’ll be contacted by a foreign exchange expert to have an obligation-free discussion about your options.

With over 17 years of foreign exchange expertise and over $100 billion transferred, OFX can help with all your currency exchange needs, including:

  • Buying property abroad
  • Emigrating
  • Regular overseas payments
  • Risk management
  • Forecasting
Min. Transfer Amount Transfer Speed Online Transfer Fee Rate Services Amount Received Description CTA Details
USD 1,000 1 day USD 0.00 18.455 Online, Phone, Bank Account to Bank Account MXN 92,276 Exclusive offer: $0 transfer fee
No-limit transfers with competitive exchange rates for 100+ currencies.
Go to site Show details
USD 1 3 - 5 days USD 75.00 18.520 Online MXN
91,211
Enjoy high maximum transfers into more than 20 currencies while saving up to 90% over local banks. Go to site Show details
USD 1,000 1 day - - Online, Phone, Bank Account to Bank Account Exclusive exchange rate discounts
No-maximum limit transfers with competitive exchange rates for 100+ currencies.
Go to site Show details
USD 100 3 - 5 days USD 5.00 18.437 Online, Phone MXN 92,092 Transfer money into 20 currencies and schedule regular payments. $5 fee waived for transfers over $5,000. Go to site Show details
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Are there any drawbacks?

There’s always the possibility that you won’t be able to favorably exercise an option, in which case you’ll be holding a worthless option.

Is there anything else I should know?

Typically, time is working against you when you buy an option. That’s because the less time you have left in an option, the less of a chance you’ll see a favorable window to exercise it.
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