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Dear sir,
Could you please help on below?
The only thing that it clear to me is when we buy we “call” and option and when we sell we “put” the option. But I did not understand at all the explanation provided in the book.
Would you kindly explain it to me?A company base in Farland (with the splot as its currency) is expecting its US customer to pay $1M in 3 month’s time and wants to hedge this transaction using currency options.
What is the option 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. Us dollar call option purchased in Farland.A. 2 – 3
B 2
C 1-4
D 4Answer from the book
The Farland business will wnat to seel the US $ when they receive themwhich implies either a US $ put (sell) option purchased in Farland or a splot call (buy) option purchased in America. In this second alternative payment would be in US $, effectively giving up US $ in return for Splot.Thanks a lot
Gabriella
You always buy options.
If you want the option (the right) to buy the other currency at a fixed price then you buy a call option. If you want the option (the right) to sell the other currency at a fixed price then you buy a put option.
They are receiving $’s, so they want to sell $’s and buy Splots.
So they can either buy a $ put option (which gives them the right to sell $’s), or they can buy a Splot call option (which gives them the right to buy Splots)
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