But if a firm has the similar need which can be met by taking the standardised contract, this option should be considered. A currency option is a right to buy or sell a currency but not an obligation. So if the spot rate of exchange is favourable at the date of maturity of contract, the holder of the option will not exercise the option and buy or sell the currency at spot rate. A call option is where the holder has the right to buy a currency. A put option is where the holder has right to sell the currency.
Currency option offers flexibility to a firm while locking up of exchange rates.
The above are the methods to deal with transaction exposure. This refers to how the present value of a firm's cash flow is affected by foreign exchange. If a firm is selling a product in a domestic market and the rate of exchange of domestic currency appreciates then they can be cheaper. So foreign competitors may come into the local market to take the firm's share of the domestic market. Similarly, it can work in a domestic firm's favour.