Question

Let us assume that you have transaction exposure doing business internationally, What approach do you prefer for handling transaction exposure? Why do you select that over the other methods?

Answer 1

if I will have the transaction exposure in the international business then I will be most probably entering into various transactions with the other countries in relation to exports and I will be trying to hedge my exposure through undertaking the position in the OPTIONS contract in the international derivatives market because option contract in exchange market will be providing me with the right and not an obligation to exercise my contract, so option contract will be desired by me because it is a standardized contract and it will be traded continuously on the option exchanges and it will mean that I will have a benefit of not being obligated to exercise the option contract and I will only have the right to exercise the contract before maturity, if my exercise price is hit.

Option contracts are better than other contracts like forward contracts and future contracts because they are all obligatory in nature, whereas option contracts does not provide for any kind of obligation for the option holder and option contracts are generally cheaper than other two and option contracts will not have any kind of counterparty risk like forward contract.