Briefly answer the following questions

(a) What is a foreign currency option? Is there any difference between a European and American option?
(b) Why might you prefer an option over a futures or forward contract?
(c) When can a gain be made by the holder of a call option? A put option?

(a) The right to buy or sell a designated quantity of a foreign currency at a specified price is called an option. If the option can be used before the expiration date, it is an American option; if only on the expiration date, it is a European option.
(b) Because there is no obligation to buy or sell at a set exchange rate in the case of an option, while there is in futures or forward.
(c) A gain can be made by the holder of a call option any time the exchange rate exceeds the exercise price. Similarly, the holder of a put option will gain if the option is exercised at any rate below the striking price.