4. An important feature of a is that the holder has the right, but not the obligation, to buy or sell currency. (a) swap (b) foreign exchange arbitrage (c) foreign exchange option (d) futures market contract

Question

Business

Esmeralda Mathews

30 October, 06:16

4. An important feature of a is that the holder has the right, but not the obligation, to buy or sell currency. (a) swap (b) foreign exchange arbitrage (c) foreign exchange option (d) futures market contract

+2

Answers (1)

Know the Answer?

Richard Horn · Answer 1

(c) Foreign exchange option

Explanation:

Derivatives refer to those securities whose value is derived from the underlying asset. Examples being currency derivatives, commodity derivatives, etc.

Foreign exchange option refers to a derivative instrument whereby the holder has the right but not the obligation to buy or sell a currency at a future date at a predetermined rate fixed today.

In a call option, the holder has the right but not the obligation to buy a currency while in a put option the holder has the right but not the obligation to sell a currency.

The predetermined price at which the holder can buy or sell a currency is referred to as the strike price or exercise price.