FX options are financial derivatives that give the holder the right, but not the obligation, to buy or sell a currency pair at a predetermined exchange rate at a future date. They are traded on the over-the-counter (OTC) market and are used to hedge against currency risk or to speculate on future exchange rate movements.

FX options can be classified as either call options or put options. A call option gives the holder the right to buy a currency pair at a predetermined exchange rate, while a put option gives the holder the right to sell a currency pair at a predetermined exchange rate.

The price of an FX option is determined by various factors, including the current exchange rate of the currency pair, the strike price of the option, the time to expiration, and the volatility of the underlying currency pair. The buyer of an FX option pays a premium to the seller, which is the price of the option.

FX options can be used by businesses to hedge against currency risk when they have exposure to foreign currencies. For example, a US-based company that exports goods to Europe may use FX options to protect against a decline in the value of the euro, which would reduce the value of their exports.

FX options can also be used by speculators to profit from changes in exchange rates. For example, a trader may buy a call option on a currency pair if they expect the exchange rate to increase, or a put option if they expect the exchange rate to decrease.