Question

What is a forward and options contract in the context of currency?

Answer 1

Forward contract is the agreement to buy or sell a designated currency at a fixed rate which is fixed today but the contract is executed at a specific date in future .

For example ,A contract is entered by an exporter with bank to sell 10 million dollars against rupees after 3 months at ₹75/$.

While Options contract gives the right but not the obligation to buy or sell a particular currency at a rate fixed today but executed at future point of time .There are two types of option contract namely put ootion and call option.

Call option gives the right but not obligation to buy a particular currency at a fixed rate in future while put option gives the right but not obligation to sell a particular currency at a fixed rate in future .

For example , A Put option entered by exporter to sell 10 million dollars against rupees at ₹75/$ in future .Now,here at the time of maturity,If price of selling dollar is greater than contracted price then exporter will not excercise the option as he can sell dollars at higher rate in market but if price of dollar is less than contracted price then exporter will excercise the option and sell at contracted price but in case of Forward contract an exporter is obligated to sell the currency whether rate is higher or lower in market as compared to contracted price