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Dear sir, I do not understand the following MCQ :
Which of the following measures will allow a UK company to enjoy the benefits of a favourable change in exchange rates for their Euro receivables contract while protecting them from unfavourable exchange rate movements?
Answer : a put option for EurosCan you explain this, please? Thank you!
An option gives the rise to convert at a fixed rate (on the date of the transaction they therefore have the choice between converting at spot or using the option to convert at the fixed rate.
Given that they are receiving Euros they therefore need the right to sell Euros at a fixed rate. Have the right to sell is a put option.
This is all explained in my lecture 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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