As a hypothetical example, an exporter is scheduled to receive dollars in six months and wants to protect itself against a stronger yen, which would reduce the yen it receives. Which position should the exporter take in a currency option?
Quiz: Currency Options
Last reviewed: September 25, 2026
This is a draft, shown for review before publication.
4 questions to check your understanding of the chapter “Currency Options”. Choose an answer and select “Check answer” to see the answer and explanation. You can also open “Answer and explanation” to see the answer first.
Question 1
Answer and explanation
Answer: C
When the yen strengthens, the dollars the exporter receives convert into fewer yen. The exporter therefore buys the right to hand over dollars and receive yen. This right is a put option to sell dollars and, at the same time, a call option to buy yen. It is therefore called a "USD put / JPY call," and the two names describe the same right, seen from the dollar side and from the yen side.
"USD call / JPY put" is the opposite right, to pay yen and buy dollars. An importer that will have to pay dollars later buys it to protect itself against a weaker yen.
The seller of an option receives the premium but is obliged to honor the right if the buyer exercises it. Taking the selling side therefore does not protect against a stronger yen.
Learn more: FX Options
Question 2
As a hypothetical example, an importer is scheduled to pay USD 500,000 for imports in six months. It has bought a USD call from a bank, with an expiry matching the payment date, a strike of 145 yen, and a principal of USD 500,000, at a premium of 2 yen per dollar. The option can be exercised only on the expiry date, and interest on the premium is ignored. If the spot exchange rate at expiry is 150 yen per dollar, how much, in yen, does the importer pay for the USD 500,000, premium included?
Answer and explanation
Answer: A
The spot exchange rate at expiry of 150 yen is above the strike of 145 yen (a weaker yen), so the importer exercises and buys dollars at 145 yen. The cost of the dollars is 145 yen × 500,000 = 72.5 million yen. The total premium is 2 yen × 500,000 = 1 million yen. Together they come to 72.5 million yen + 1 million yen = 73.5 million yen. Per dollar, that is 145 + 2 = 147 yen. However far the yen weakens, the importer pays no more than this.
75 million yen is the cost of buying dollars at the spot exchange rate of 150 yen with no hedging. The 72.5 million yen choice is only the cost of the dollars on exercise, without the premium. The 76 million yen choice is the 75 million yen paid when buying at the spot exchange rate without exercising, plus the premium.
If the spot exchange rate at expiry is 140 yen, below the strike (a stronger yen), the importer abandons the right and buys dollars at the spot exchange rate. The cost is 140 yen × 500,000 = 70 million yen, or 71 million yen with the premium added. In this case the importer pays 1 million yen (the premium) more than with no hedge. From the side of the bank that sold the option, at 150 yen it hands over dollars worth 150 yen each for 145 yen. Including the premium it received, its profit or loss per dollar is 145 − 150 + 2 = −3 yen, a loss of 3 yen. The buyer can lose at most the premium paid, while the seller's loss has no theoretical limit.
Learn more: FX Options
Question 3
As a hypothetical example, a USD/JPY option with a three-month expiry is quoted with an ATM volatility of 10.0%, a 25-delta risk reversal of −1.0 percentage points, and a 25-delta butterfly of 0.3 percentage points. The risk reversal is the call volatility minus the put volatility. What is the volatility of the 25-delta call?
Answer and explanation
Answer: B
The volatility of the 25-delta call is the ATM volatility plus the butterfly plus half the risk reversal: 10.0 + 0.3 + (−1.0) ÷ 2 = 9.8%.
The put volatility is 10.0 + 0.3 − (−1.0) ÷ 2 = 10.8%. The call minus the put is 9.8 − 10.8 = −1.0 percentage points, which returns the risk reversal. The average of the two is (9.8 + 10.8) ÷ 2 = 10.3%. Subtracting the ATM volatility of 10.0% gives 0.3 percentage points, which returns the butterfly. 10.8% is the put volatility. 10.3% is the average of the call and put volatilities. 9.3% is what you get by adding the risk reversal in full instead of halving it.
Learn more: FX Option Market Conventions
Question 4
Currency options are often quoted by delta, as in "25-delta call." Which statement about these quotes is correct?
Answer and explanation
Answer: D
Delta comes in two types: spot delta, which includes the foreign-currency discount factor, and forward delta, which does not. There is also a distinction between premium-adjusted and unadjusted delta. The same option has a different delta value under each type, so the strike that "25-delta" refers to also differs.
Which type of delta is standard differs by currency pair. The strike of ATM forward is the forward exchange rate, while that of ATM spot is the spot exchange rate, so the two are not the same. The call and put are chosen so that the absolute values of their deltas match, so their strikes are not necessarily the same distance from the current rate above and below.
Learn more: FX Option Market Conventions