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I am still confused between the choice of Put and Call options.
Should I automatically choose a Put when I am expecting to make a payment in the future, and a Call when I am expected to receive money in the future.
Is the aim to create a zero sum equation just like in money market hedging?
It depends on what the contract currency is.
If you are in the UK and needing to pay (for example) $’s on the a future date, then you want an option that gives you the right to buy $’s at a fixed rate. So if the contract size is quoted in $’s you want a call option – the right to buy $’s. If the contract size was quoted in £’s then you would want a put option – the right to sell £’s (because buying $’s would mean selling £’s).
It is certainly not a zero-sum game! Using options is limiting the worst that can happen while giving you the benefit if exchange rates move in your favour.
I think you would find it useful to watch my free lecture on this.
Thanks for the explanation, I did watch the lectures but missed the part about contract size being the determinant.
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