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Would you expect exchange rates to be moving in your favour or not when you choose currency options as a way to minimise risk?
Why is it “in your favor”? not against?
If we were 100% certain that exchange rates would move in our favour then we would be best to do nothing at all and get the benefit of it.
Because we are never 100% certain, there is always the risk that exchange rates move against us and we would be worse off. The whole point of options is that if exchange rates move in our favour then we still get the benefit (and we would not exercise the options) but if they do move against us then we exercise the options and are protected against losing. It is just like taking out insurance.
Sir, u didnt understand me. Textbook says “we put/call options when we think that exchange rate will move against us. But this test says in your favor. Is that a misprint ? tell me 100 % rule pls. im confused
I certainly did understand you and my answer was completely correct.
Either you have misunderstood your textbook or it is wrong.
If you though the exchange rate would move against you then you would use a forward rate or money market hedging or futures – you would not spend money buying an option.
There is no misprint in our test!
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