Currency Options are primarily used to deal with foreign financial contracts to purchase a specific amount of foreign currency at a specified fixed price. The seller of the option charges a premium to the buyer for providing the hedging service, even if the buyer chooses not to exercise their power to buy the currency at the expiration date of the contract. The premium is typically calculated as a percentage of the currency option price. There is specific terminology used to describe parties and actions involved with a currency option. The seller is also known as the writer, they have the option to put, or sell the foreign currency, at which point the buyer can call to buy that particular option. The exchange price or the strike price can be at the money, be equal to spot price; in the money, lower than the spot price; or out of the money, higher than the spot price. Unlike the first two, the latter would not be profitable. Generally there are two main types of options. They are either American, having the option to be exercised at any time or European, which are restricted to being exercised only on the expiration date. To facilitate the exchange of currency options there are three possible markets: over the counter(Interbank), on an organized exchange(such as the Philadelphia Stock Exchange), or on the International Monetary Market. The over the counter method and organized exchange are used for physical currency while the International Monetary Market is used for currency options on futures contracts. In order to make a profit on currency options the owner must exercise when the perspective currency is at a favorable price. For example: if the spot exchange rate is 1 USD = 5 Mexican Pesos, with a strike price of 1 USD = 8 Mexican Pesos. Therefore the value of the Mexican Peso depreciated, but the lost purchasing power was saved with the currency option. Bibliography Malz, Allan. "Currency option markets and exchange rates." Current Issues in Economics & Finance. 15 May 2009 < http://search.ebscohost.com.libproxy.fullerton.edu/login.aspx?direct=tru... site&gt; > Shim, Jae. "Currency Options."Encyclopedic Dictionary of International Finance and Banking. 2001. Print.