An option contract (a currency derivative) that gives its holder the right, but without the obligation, to buy or sell a specified amount of a given currency at a specified exchange rate on a fixed future date (a European currency option) or on any date up to expiration date (an American currency option). The buyer pays the option’s seller (writer) an amount of money (the premium) as a price for the time-bound right to exercise on the underlying currency.

For instance, a yen/dollar option contract may give the holder the right to sell 83 million Japanese yen (JPY) and buy 1 million US dollar (USD) on March 10. As such, the underlying exchange rate is USD/JPY 83, and the notional amounts are JPY 83 million and USD 1 million. This option can be viewed as a call option on dollars, and hence is labeled USDJPY call, and a put option on yen, and hence is denoted JPYUSD put. If at expiration date, the exchange rate turned out to be less than USD/JPY 83 (say USD/JPY 80), that is the yen has appreciated against the dollar, then the option would be exercised so that the holder sells yen at USD/JPY 83, and immediately buys yen back at USD/JPY 80, making in the process a net profit of:

JPY 83 million – JPY 30 million = JPY 3 million.

This option is also known as a forex option or FX option.