The option premium is normally stated as a percentage of the contract amount, and is paid when the transaction has been carried out. The size of the premium is determined by the following factors:
The two variables the company itself can choose are term and strike price. The term is often evident from the underlying position to be hedged, while the strike price is something the company can choose in order to affect the option premium. Many will choose a strike price similar to the current spot rate or forward rate. However, it is not uncommon for the strike price to be drastically different, which often reduces the option premium.
A significant reduction in the option premium can be achieved by choosing a strike price higher than the market rate. provided that the right to purchase the underlying currency value is purchased, and correspondingly by choosing a low strike price when there is a right to sell.