Forex Options Explained

Forex options, more properly known as foreign exchange options are financial instruments classified as derivatives. They are also known as currency options or FX options. The nature of forex options is that owners have the right to swap various currencies into previously agreed-upon exchange rates on specific dates. The owners of forex options are not required to do this however, and there is no obligation to exchange, hence the term "option".

Before forex options are more thoroughly discussed, we must first understand what derivative financial instruments (also known as derivatives) are. Derivative financial instruments are with values based on the values of something else such as assets, interest rates, and in the case of forex options -currency exchange rates. These are but some of the things derivative financial instruments are derived from. They are used to minimize the financial risk of a party in the contract while allowing the opposite party to have a chance of high returns for higher financial risk.