Options versus Forward Contracts.
The ideal use of forward contracts is when the exposure has a straight risk-reward profile: Forward contract gains or losses are exactly offset by losses or gains on the underlying transaction. If the transaction exposure is uncertain, however, because the volume or the foreign currency prices of the items being bought or sold are unknown, a forward contract will not match it. By contrast, currency options are a good hedging tool in situations in which the quantity of foreign exchange to be received or paid out is uncertain.