A currency option is a contract that gives its holder the right to buy or sell a currency at a certain price on or before a specified date. A call option permits the buyer to acquire the underlying currency at the strike price, while a put option allows the buyer to sell the underlying currency at the strike price. Currency options are used to protect against the effects of adverse changes in exchange rates.
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.