Currency call options

A currency call option is a contract that gives the buyer the right to buy a foreign currency at a specified price during the prescribed period. People buy currency call options because they anticipate that the spot rate of the underlying currency will appreciate. Currency option trading can take place for hedging or speculation.

Hedging in the call options market MNCs with open positions in foreign currencies can utilize currency call options. Suppose that an American firm orders industrial equipment from a German company, and its payment is to be made in euros upon delivery. A euro call option locks in the rate at which the US company can purchase euros for dollars. Such an exchange between these two currencies at the specified strike price can take place before the settlement date. Thus, the call option specifies the maximum price that the US company must pay to obtain euros. If the spot rate falls below the strike price by the delivery date, the American firm can buy euros at the prevailing spot rate to pay for its equipment and can simply let its call option expire.

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