Commodity Options
What happens if an agricultural producer would like to secure the price for the future crop, but doesn’t want to commit to a futures contract in case the harvest is bad and they would have to buy some crop in the market to satisfy the amounts they promised? To meet this need, commodity options were introduced.
A commodity option is not an option to buy or sell physical commodity, but an option to buy or sell a futures contract on the commodity. So by buying an option, the farmer can buy insurance that he will get a good price without fully committing to the production level. Given the unpredictable nature of the weather, and hence the crop, it can be a good plan to take futures contracts for the minimum crop expected, and have options for the rest.
Currency Options
With a currency option, you get the right but not the obligation to exchange two currencies at a predetermined rate at a certain date in the future. Effectively, that includes both a call option and a put option, as you have the right to sell a currency and the right to buy another currency.
They can be used by financial houses, banks and corporations to hedge against adverse currency moves for a future transaction. As opposed to a futures contract, if the currency moves in favor of them, the business can benefit from it rather than being stuck with the rate they agreed. The disadvantage is the cost of the option.
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