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I would like to ask why is it a call option instead of put option for Q1. The currency option quoted is: contract size $125,000, exercise price € per $, premium price € per dollar. If the option is quoted in $, hence it is the right but not the obligation to buy or sell $. If we anticipate € depreciating since question states a permanent shift (meaning $ will appreciates). We will receive less $ after converting the € reciept. Is my understanding correct as of this point? I cant seems to grasp the logic of call/put options. If you could please explain the logic to derive a call option?
Since we are receiving €’s, we will be selling €’s and buying $’s.
Therefore we need the option to buy $’s at a fixed price, which is a call option.
(If we were paying €’s then we would be selling $’s to buy €’s and would therefore need to right to sell $’s at a fixed price – i.e. a put option)
My free lectures do explain all of the logic involved.
Notwithstanding € depreciating/appreciating, we will need to sell € and buy $ since we are receiving €? Is that correct? Since if € appreciates, we do not need to exercise the option. If we reverse the scenario, we need to make a payment in €, we will buy € and sell $. As such, it will be a put option – the right but not the obligation to sell $? I went throught the free lectures but i cant seems to catch the principle behind currency options.
I am sorry, but I really can’t simply repeat the lectures again here.
The whole purpose of using an option is to create a limit to the worst that can happen.
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