Question

Which is true of foreign currency forward contracts and foreign currency options? Foreign currency forward contracts Foreign currency options ? Question 5 options: ?Requires up-front fee Requires up-front fee ?Party may “walk” if “out of the money” Party may “walk” if “out of the money” ?Requires no up-front fee Party may “walk” if “out of the money” Represents a right rather than a legal obligation Requires up-front fee

Answer 1

Foreign Currency Forward Contracts are contracts, a legal obligation, to buy or sell a specific lot of Foreign Currency for Another Currency at a specific due date in future.

They do not require Upfront Fee, they represent a contract and legal obligation you cannot walk out of.

Whereas Foreign Currency Options are exactly that, an option to buy or sell a specific lot of Foreign currency for another currency at a future settlement date.

They are not a legal obligation, and when you are out of money, you need not exercise (walk out) and they require an upfront fee.

Good luck