What are the differences between foreign currency option contracts and forward contracts for foreign currency?
What will be an ideal response?
The primary difference between a foreign currency option contract and a forward contract is that the option contract gives the purchaser of the option, the right, but not the obligation to transact. If the state of the world in the future is favorable to the purchasers of the option, they will transact. If the state of the world is unfavorable, the option is worthless. Forward contracts are completely uncontingent on the state of the world in the future.
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