What Are Currency Options Sold Through an Options Exchange?

U.S. dollars

Currency options are derivative investment vehicles relating to the currency markets. These options are traded both on and off of exchanges. Those options traded off exchange are also known as over-the-counter or OTC options.

Currency Options

Currency options are derivatives that give the buyer the right to buy or sell a currency at a specified exchange rate. They are used by both hedgers and speculators in the currency markets. Hedgers use options to protect themselves from changing exchange rates while speculators use them to profit from changing exchange rates.

The Exchange

Some currency options are traded over the counter (OTC) while others are traded on an exchange. The main benefit of the exchange is regulation. A central exchange regulates trading and guarantees the integrity of all trades through a clearing house.

Currency Pairs

Currency is traded in pairs with the first currency quoted in terms of the second. For example, the EUR/USD or Eurodollar gives the value of the euro in U.S. dollars. Therefore, an option to buy the Eurodollar is an option to buy the euro at a specified U.S. dollar rate and an options to sell the Eurodollar is an option to sell the euro at a specified U.S. dollar rate.

References

• CME Group: FX Options