Understanding Currency Options: Types and Benefits

Currency options empower investors to hedge exchange rate risks effectively.

### Understanding Currency Options: A Guide for Investors
* 💱 Currency options are derivative contracts that allow investors to **speculate on exchange rates** and **hedge their financial exposures**.
* 📅 The contract grants the buyer the **right, but not the obligation**, to buy or sell a currency at a **predetermined price** on a specified date, while the seller must **honor the contract if exercised**.
* 🔄 There are two main types of currency options: **call options**, which provide the **right to buy**, and **put options**, which provide the **right to sell**.
* 💼 For instance, ABC Company Limited books a call option with a strike price of **rupees 75** for a payment due in **six months**, paying a premium of **rupees X**.
* 📉 If the USD/INR rate is at Rs 73 on the payment date, the company opts not to exercise the option, but if the rate rises to rupees 77, it exercises the option to **pay at rupees 75**.
* 💰 One key feature is that the buyer of a call or put option enjoys **unlimited profit potential**, with losses limited to the **premium paid**.
* 🛠 Federal Bank offers professional structuring and customized hedging solutions, integrating **options and forwards** for **smart hedging strategies**.
* 📚 "Knowledge is power," and staying informed can **empower you to make better financial decisions** with the help of Federal Bank, your ideal banking partner.

federal bank presence treasury knowledge series. What is currency option? Currency options provide an opportunity for investors to take a view on exchange rate and use it for hedging their exposures. Currency option is a derivative contract that gives the buyer the right but not the obligation to buy or sell the currency at a stated date and at a predetermined price. The seller of the contract has the obligation to honor the contract when the contract is exercised. There are two types of currency options: call and put. A call option gives the right to buy, and a put option gives the right to sell. For example, ABC Company Limited, an importer, has to make a payment six months from now. He books a call option with a strike price of rupees 75, delivery on a particular date, and pays a premium of rupees X for the same. On the payment date, if the USD/INR is at Rs 73, he does not exercise the option and takes the market rate for his transaction. On the payment date, if USD/INR is at

rupees 77. He exercises his option and makes the payment in rupees 75. Key features and benefits: Buyer of a call put option has unlimited profit potential, whereas the loss is only limited to the premium paid. Professional structuring desk to help you out with customized hedging solutions or products based on your business requirement. Smart hedge solutions combining options and forwards. Knowledge is power. Empower yourself with the latest information. Federal Bank, your perfect banking partner.

What is Currency option?

Federal Bank

Currency options are derivative contracts that allow investors to hedge their exposure to exchange rate fluctuations.

They give the buyer the right, but not the obligation, to buy or sell a currency at a predetermined price on a specified date.

There are two types of currency options: call options (for buying) and put options (for selling).

The buyer of a call option has unlimited profit potential, while the loss is limited to the premium paid.

Customized hedging solutions and smart hedge options are offered to meet business requirements.

Staying informed with the latest information is crucial for making empowered financial decisions.