This helps to move away from some of the problems that are associated with the forward contract and the borrowing side of things.
It allows the buyer the chance without an actual obligation to buy or sell at a future date at a specified rate - hence it is called an Option and not a Contract!
The cost is referred to as the premium.
As can be seen the key benefit from this is that you can benefit from a good movement in the exchange rate but if bad then you can just walk away as you don't have to go through and exercise the option.
Of course there is a downside to everything and here it is the premium that is paid, nevertheless this is a good alternative and helps remove some of the problems with future contracts.
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