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Sir, sorry for deluging you with questions.
1) Reg currency options, on the exercise date, if the contract size is not in whole numbers, is it necessary to hedge the unhegded portion using forwards?
2) If we overhedge, then irrespective of whether we are hedging a payment or receipt, will the excess hedge be considered a receipt?
3) If we underhedge, then irrespective of whether we are hedging a payment or receipt, will the excess hedge be considered a payment?
Thanks a lot for all your valuable help!! 🙂
1. It is not necessary, but it would be sensible to. (Not on the exercise date – that would be too late – you would use forward rate (assuming they are available) at the same time as you buy the options.
2 & 3 No!
If you are paying money and have under-hedged, then the amount under-hedged will be a payment. If you are receiving money and have under-hedged then the amount under-hedged will be a receipt.
If you are paying money and have over-hedged, then the amount over-hedged will be a receipt. If you are receiving money and have over-hedged then the amount over-hedged will be a payment.
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