Currency Options are used by companies as risk management tools. What are Options? Simply stated, it is a contract that gives the buyer the right but not the obligation to buy an underlying asset under specific conditions on payment of a premium.

The buyer may exercise the right if it makes him/her a profit. He/she may not exercise the right if it is unprofitable. However, if the buyer of an options contract exercises his/her right to buy the underlying asset, the seller is obligated to sell the asset at the specified price.

In all foreign currency transactions, one currency is purchased and another is sold. Consequently, every currency option is both a call and a put option. A call conveys the right to buy the underlying currency at a specified price. A put gives the buyer the right to sell at a predetermined price.

Now, why options are important as a risk management and hedging tool? Lets make it clear with an example. Suppose a Japanese company has to make the payment for its imports of raw material in three months time in US Dollar.

The Japanese company can stay unhedged. It can purchase US Dollar at prevailing spot rate in three months time. On the other hand, it can hedge. Buy USD forwards or it can use an options strategy.

One of the strategies available to the Japanese company is to buy JPY put and USD call option. Buying the JPY put option will put a ceiling on the cost of imports in case JPY goes down. The company limits the cost to a maximum at the same time not limiting the minimum. You can trade these exotic options to make profits under different market conditions.

Digital options are simple, easy and inexpensive to trade. If you think, the EUR/USD rate is going to be above 1.0800 after 2 months but you are not sure about the timing of this move taking place within the next two months, buy a digital option. If after 2 months, the EUR/USD rate is indeed above 1.0800, you get your profit. If not, your digital option will expire. You with lose only a small premium that you had to pay while purchasing the digital option.

One Touch Options are perfect vehicles for those forex traders who believe that there will be a retracement. The price action of a given currency pair will test a support/resistance level with a false breakout. The one touch options will pay a profit if the market touches the predetermined barrier level. If not, you lose a small premium.

A No Touch Option is a great way to profit from a trending market. The no touch option pays a fixed amount if the market never touches the barrier level that you choose. All you need to do is to determine the desired payoff, the currency pair, the barrier price and the expiration date.

A Double No Touch Option is perfect for you if you have the successful record of identifying and profiting from breakouts. But you have always lost money when the market is ranging. On the other side, you can use a Double One Touch Option if you know how to pick the tops and bottoms in a ranging market. However, you have always lost in a breakout market.