The option contract gives the option purchaser the right (but not the obligation) to buy or sell a given amount of foreign exchange in the underlying currency at a fixed price per unit (strike or exercise price) within a specified period of time (set by the maturity or expiration date).
A call option gives the investor the right to buy the foreign currency; a put option gives the investor the right to sell a foreign currency.
An American option gives the buyer the right to exercise at any time up to the exercise date; a European option can be exercised only on the expiration date.
The cost of the option is usually referred to as the option premium.
Options on futures contracts give the buyer the option to purchase currency futures contracts instead of the underlying currency itself.
The intrinsic value of an option depends on the relationship between the strike price and the exchange rate of the underlying currency, A call option has an intrinsic value equal to the maximum of zero or the difference between the underlying exchange rate and the exercise price. A put option has an intrinsic value equal to the maximum of zero or the difference between the strike price and underlying exchange rate.
An option with a positive intrinsic value is said to be 'in the money'. Options with no intrinsic value are said to be 'out of the money'. An 'at the money' option is one whose strike price is equal to the underlying exchange rate.
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