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Company based in Farland with Splot its currency is expecting its US customer to pay $1000000 in 3 months time and wants to hedge this transaction using currency options. What is the options they require?
1) A Splot put option purchased in America
2) A US dollar put option purchased in Farland
3) A Splot call option purchased in America
4) A US dollar call option purchased in FarlandCorrect ans is 2 and 3. The reason why 2 is correct I have understood as US dollar put option means right to sell US dollar. But I cannot understand why 3 is also correct. Can you please explain?
They are receiving $’s and so they need to sell $’s (so a $ put option) and buy Splots (so a Splot call option).
But why we buy Splots (Splot call option)? In the question we will receive $1000000 in 3 months time and in order to hedge this transaction using currency option we simply need to sell $ which implies $ put option
Did you not read my previous reply? They are selling $’s and therefore buying Splots.
Read again what I wrote.Ok. So in options in each transaction if company wants to exercise option then in each transaction it will be effectively exercising put and call option both rather than just exercising either put or call option. Right?
Wrong.
They need to sell $’s in order to buy Splots.
So if they use options, they can either buy an option to sell $’s at a fixed rate (a $ put option), or alternatively buy an option to buy Splots at a fixed rate (a Splot call option).
Which they decide to do depends on which options are available, but doing either will effectively limit the exchange rate.
Sir as you said that alternatively they can buy an option to buy Splots at a fixed rate (a Splot call option), so when buying splots they will have to make payment in $, correct? So also in this case would it be correct to say that they are selling $?
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