Options / Futures/ Forwards

I do not know what you mean by 'two types'! It is all explained in detail in my lectures and you cannot expect me to type them all out again here. You will have to say specifically which part you did not understand.

I meant 'two types' refering to call & put options. I have a problem understanding the difference between these two contracts such as forward contracts & futures contracts. All I am aware of these two is that they both are contracts to buy or sell specified asset at a specific price at a future date.

Using forward rates and using futures effectively fixes the exchange rate on the date of the transaction. So whether the actual exchange rate moves in our favour or moves against us, the amount we end of paying (or receiving) is fixed (so we do not lose anything if the rate moves against us, but we don't gain anything if the rate moves in our favour). Options are different in that they give us the right to convert at a fixed rate, but we do not have to use that right - if we prefer then when it comes time to convert the money we can convert at whatever the actual exchange rate it. So, if the exchange rate has gone worse for us we will use the option and convert at the option rate. But if the exchange rate has gone better for us then we will throw away the option and convert at the actual exchange rate (and do better as a result). So using options limits the worst that can happen, but lets us benefit if exchange rates move in our favour. The only downside is that we have to pay for the option whether we end up using it or not. Do appreciate that for Paper FM you cannot be asked for calculations for options or for futures - you are only expected to be able to discuss the idea. It is only the use of forward rates (and money market hedging) for which you can be expected to do calculations.