Currency options give the owner the right to exchange at a pre-agreed rate. Which statement is correct?

• A. They grant the owner the right to exchange at a pre-agreed rate
• B. They obligate the holder to exchange if exercised
• C. They guarantee profit regardless of exchange rates
• D. They carry no premium

Answer: (A)

Currency options give the owner the right, but not the obligation, to exchange at a fixed rate. That fixed rate is the pre-agreed rate, often called the strike rate. Because the holder has a choice, they can exercise only if the market rate makes it advantageous; if not, they simply let the option expire and only lose the premium paid for the option.

This is why the statement that best describes currency options is the one that says they grant the owner the right to exchange at a pre-agreed rate. The other ideas don’t fit: they do not impose an obligation to exchange (exercising is optional, unlike a forward), they do not guarantee profit for any outcome, and there is typically a premium paid to obtain the option.