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Foreign Currency Contract and Option

A contract traded in the interbank market to buy or sell a foreign currency. Trades of these option contracts settle either spot or forward.

In the US, options are traded on all currency except the US Dollar. If a put option was invested on an overseas currency, that means the US investor thinks that currency will decline vs. the dollar. If the options trader thought the US dollar would fall, he could buy a foreign currency call option against the dollar.

Call and put options have short term expirations. If a currency option was bought, the investor could lose 100% of the premium invested - if the contract was not exercised or traded prior to the expiration month.

The maximum gain for foreign currency calls is unlimited, since the contract value is based on an increase in the foreign money value.

Puts could gain the full difference between the contract strike price and zero - minus the premium paid. Put options on foreign currency gain when the value declines.

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