• Currency options are used to manage foreign exchange exposure.stock market analysis screenshot image by .shock from Fotolia.com
  
  Currency options, also known as foreign exchange options, are financial instruments that are used by foreign exchange market players to manage their currency exposures. The issuer of a currency option acts as an insurer against an exchange rate going up or down above or below a certain level. Financial institutions, large multinational companies and speculators use currency options to reduce the risk that an exchange rate will move unexpectedly and might adversely impact their foreign exchange positions.
  
  

Call Options

• A call option is a currency option that gives the buyer the right, but not the obligation to buy a certain amount of currency at a predetermined price (strike price) by or at a certain date. Investors and traders buy call options in order to hedge against the risk of the exchange rate going up, whereby they "lock in" a certain price at which they can buy the currency, if the market exchange rate goes up, they will exercise the option and buy the currency at the strike price, which will be lower than the current market price.
  
  

Put Options

• The put option is different from the call option in that it gives the buyer the right to sell a currency as opposed to the right to buy a currency, as with the call option. Investors and traders buy put options, when they want to hedge against the risk that an exchange rate will decline.
  
  

American-Style Options

• American-style options are call and put options, which can be exercised at any point in time before the maturity of an option. American-style options allow investors to earn high returns, as exchange rates are often volatile, and the chances of exchange rates going up or down before maturity date are relatively high.
  
  

European-Style Options

• European-style options are different from American-style options. They give buyers the right to exercise an option only when the option will mature and not before that. Because issuers of this type of options are more secure (they are less likely to suffer from short-term exchange rate fluctuations), European-style options cost more than American-style options.