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You are the finance director of Sydonics Engineering and expect that a bid to build a new plant in Southern France may be accepted in three months time. If the contract is accepted, an immediate capital spend of €150million will be
required in three months and the company will receive a €75million grant from the European Development Fund in nine months time.
You have decided to hedge the exchange rate risk by the purchase of EUR/STERLING at-the-money options which have a contract size of 100,000 Euros.
Q) how many contracts need to be bought to eliminate FOREX risk exposure?
In model answer ..N(d) and N(-d) has been used to arrive at 2,785 & 3,435.
whereas i think we need to buy currency required divided by contract size so it should be (150 million/100,000=1500 call option) and (75 million/100,000=750 contracts)..if i am buying these option at the money…then i can exercise at end of 3 and 9 month respectively to hedge my FOREX exposure..why should i delta hedge in these situation?
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