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when it comes to foreign currency options, could you please explain the logic behind deciding if to but caall or put options e.g; where (1) we are due to receive USA dollars from customer and (2) where we are due to pay a USA dollar customer.
Note: Options contracts are as per usual expressed in pounds
* that should be “decide of to buy call or put options” *(comment box not allowing to correct)A call option is the right to buy pounds at a fixed rate. A put option is the right to sell pounds at a fixed rate.
So…..if you are in the UK and are going to receive US $’s then you will want to sell the $’s to the bank to buy £’s, so you will buy call options.
If you are in the UK and are going to need to pay US$’s then you will want to buy $’s from the bank and therefore need to sell £’s, so you will buy put options.
(Have you watched my lecture on this? It is the second lecture on foreign exchange risk management.)
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