Call options may be regarded as deposits to lock in future purchases at a pre-determined price while puts can be seen as insurance against surprises, i.e. facilitating the divestment of assets should their value fall. The price for this buyer assurance is the premium – the cost of the options contract itself. And because options confer rights and not obligations, the most that buyers can lose is their premium. By contrast, the party on the other side of the contract – the call or put seller – is obliged to buy or sell if asked and can thus lose far more than the price of the premium.
Forex markets can be very volatile, particularly emerging market currencies, but even the major pairs can move dramatically on a central bank policy change, a political event, or on significant economic news. FX options give investors the opportunity to be part of this exciting market but to also hedge their risk of suffering unexpected losses.
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FX options, or forex options, are contracts that give buyers the right, but not the obligation, to buy or sell a specified currency at a set price on or before a certain date. The right to buy is known as a call option while the right to sell is a put option, and both may be taken out on virtually the entire range of the tradable forex spectrum. The greatest liquidity, naturally, is to be found in the major pairs – EURUSD (euro/dollar), USDJPY (dollar/yen) and GBPUSD (sterling/dollar) as well as the dollar versus the Australian, Canadian and New Zealand dollars (AUDUSD, CADUSD and NZDUSD, respectively).