Accounting Dictionary

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Currency Option

Definition: A currency option is a contract requiring the payment of a premium in exchange for the right to use one currency to buy another currency at a specified price on or before a specified date. A call option permits the buyer to buy the underlying currency at the strike price, while a put option allows the buyer to sell the underlying currency at the strike price.

A currency option is easier to manage than a forward exchange contract, because an entity can choose not to exercise its option to sell currency if a customer does not pay it. Not exercising an option is also useful when an entity can realize a gain on changes in the exchange rate.