Abstract
The most important aspect of foreign exchange risk management is to incorporate foreign exchange expectations into all basic decisions. Foreign exchange options are a valuable risk management tool. A foreign exchange option contract provides the right, but not the obligation, to buy or sell a foreign currency at a predetermined exchange rate for a specific date or time period. By offering a fixed rate and the option of either exercising the contract or buying/selling on the spot market, an options contract allows one to take advantage of favorable market conditions, while protecting oneself against unfavorable currency movements. A premium is payable on the trade date. If the option is not exercised, the premium is forfeited.