In the context of managing exchange rate risks, which of the following statements is true of an option?
A) An option is similar to a forward contract that does not allow for purchase of currency from a bank.
B) A trader uses an option to buy and sell currencies at different exchange rates on the same day.
C) A trader planning to purchase an option is compulsorily required to couple a spot transaction with a forward transaction.
D) Even after purchasing an option, it is not an obligation to buy a certain amount of currency at a given exchange rate.

Question

Quizplus · Accepted Answer

An option gives the holder the right, but not the obligation, to buy or sell a certain amount of currency at a specified exchange rate, unlike a forward contract which obligates the parties to transact.

In the Context of Managing Exchange Rate Risks, Which of the Following