What a currency option buys
A conventional currency option specifies two currencies, an amount, a strike exchange rate and an expiration. The buyer pays a premium for a contractual right. The seller receives the premium and must fulfill the contract if exercise or settlement requires it. An option can expire unused; that flexibility is what distinguishes it from an obligation to exchange currencies.
Read the underlying carefully. An OTC EUR/USD option may describe an exchange of euros for dollars. An exchange-listed euro option may instead be an option on a euro futures contract. The economic exposure can be related without the contracts being interchangeable.
Read the pair from left to right
In EUR/USD, the euro is the base currency and the dollar is the quote currency. An illustrative rate of 1.10 means one euro costs 1.10 dollars. A rise to 1.15 means the euro has strengthened against the dollar. In USD/JPY, the dollar is the base, so a rising number means the yen has weakened against the dollar.
Buying a call on euros against dollars gives a right to buy euros and sell dollars. In that sense, it is also a put on dollars against euros. Dealers may describe the same economic exchange in different ways, so confirm both currencies and the quote convention rather than relying on the word “call.”
Explore the major currency pairs
Sources and further reading
Official references for the mechanisms and contract conventions discussed here. Follow the provider’s current contract rules when evaluating an actual product.