Which of the following best describes the purpose of currency options?

The purpose of currency options is specifically to hedge against currency risk or to engage in speculation. Currency options provide the holder the right, but not the obligation, to buy or sell a currency at a predetermined price within a specified time frame. This flexibility is essential for mitigating the risks associated with unfavorable exchange rate movements. Companies and investors can use options to protect themselves from losses when dealing with foreign currencies, allowing them to stabilize cash flows and financial planning.

Additionally, currency options can be used for speculative purposes, enabling traders to potentially profit from movements in currency values without a substantial capital outlay, which adds to their appeal. This dual functionality—hedging and speculation—distinguishes currency options from other financial instruments, making option B the most accurate description of their purpose.

In contrast, options that guarantee profit in every transaction aren't feasible due to the inherent volatility and unpredictability of the currency markets. Replacing forward contracts completely is not accurate since currency options and forward contracts serve different purposes and are often used in conjunction. Finally, setting fixed exchange rates across all transactions does not align with the dynamic nature of currency markets, where rates fluctuate constantly.