What are currency options & how do they work?

By entering into both transactions, the firm is able to reduce its foreign exchange rate risk by locking into the price for both. Currency options are the option or the right—but not the obligation—to exchange a specific amount of currency on a specific future date and at a specific agreed-on rate.

What is a foreign currency?

Foreign Currency Definitions: Foreign Currency: Any currency other than the functional currency of the entity. Spot Exchange Rate: The exchange rate for immediate delivery. Exchange Difference: The difference arising from translating a specific number of units of one currency into another at different exchange rates. Initial Recognition:

Why do companies need to convert currencies?

Companies, investors, and governments want to be able to convert one currency into another. A company’s primary purposes for wanting or needing to convert currencies is to pay or receive money for goods or services. Imagine you have a business in the United States that imports wines from around the world.