Question

You are the financial analyst fir the firm named Sixties Wine that distributes California wine in Italy.Your firm routinely hedges its exposure to the EUR In the past, the firm has used long position in EUR put options to accomplish its hedging objectives. Due to a change in market liquidity conditions, the firm finds that it is no longer possible to use EUR put options. One your colleague recommends that the firm use short posiions in call options on the EUR and makes the claim that "short positions in call options on the EUR are identical to long positions on put options" Critically examine this statement

Answer 1

As the firm Sixties has the long position on the put option to accomplish its objectives by investing the amount of money into the. market. But due to change in the market liquidity conditions the firm is not able to hod the position for the Longer period of time as if the firm tries to hold the put option for a longer duration of time that means the expiry of the options are late and the price of the shares can go down as the market is not good from the organisations perspective. There is a change in the trend of the market due to the change in the liquidity of the market. Because of there is a change in to the market and the investors are investing their money and withdrawing their money from the market. According to the data available into the question this seems that the company has Buy the put option for which has long expiry date when the market was showing bearish trend.

But now the condition of the market is showing the bearish trend according to the given data so the Sixties organisation should go for the Call option for short position and recover the amount of money which they have lost in the market due to the change in the trend in of the market.

If the organisation follow this it can make the good amount of profit and recover the loss of money into the market.