Basically, options can be defined as instruments that give the right to sell or buy an asset at a fixed price on an agreed date.
The most important feature of foreign exchange options, in contrast to forward contracts, is that they give the buying party the right, rather than obligating it, to buy or sell on the agreed price. Meanwhile, interest rate options are those based on securities with an interest rate.
Options issued in foreign exchange and interest transactions can be divided into different categories. Options can be issued on spot products, as well as on derivatives; e.g, options on futures contracts, options on options, or futures-type options.
Below you can find general definitions related to options.
Option premium is the price to be paid by the buyer to the seller in exchange for the buying and selling right established as per the option contract. In other words, it is the fee demanded by the seller against the risk that it may face during the option period as a result of drawing up the contract.
Exercise or strike price:
Exercise or strike price is the previously determined exchange rate with which foreign exchange buying and selling transactions will be performed when the option is exercised by the buyer.
In European-type options; expiry date represents the date on which the buyer can exercise the option, whereas on American-type options; it represents the last date on which the buyer can exercise the option.