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Exporters plc, a UK company, is due to receive 500,000 Northland dollars in 6 months’ time for goods supplied. The company decides to hedge its currency exposure by using the forward market. The short-term interest rate in the UK is 12% per annum and the equivalent rate in Northland is 15%. The spot rate of exchange is 2.5 Northland dollars to the pound.
Hello can u confirm please that if we want to use options hedge then in this case we will buy a put option right? To sell the foreign currency?
I am puzzled as to why you are asking this because in the question as you have typed it, options are not available. The only hedging method available is the use of forward rates, which have nothing to do with options.
If options were available then it would depend on which currency the options were quoted in. If the options are in Northland $’s then we would want put options. If the options are in GB Pounds then we would want call options.
Have you watched my free lectures on foreign exchange risk management? The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
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