Why do options provide insurance against foreign exchange risks in bidding situations? Why can't you hedge...

Why do options provide insurance against foreign exchange risks in bidding situations? Why can't you hedge with a forward contract in a bidding situation?

Expert Solution

Options will be providing insurance against foreign exchange risk in bidding situations because options are non-obligatory in nature and they will be providing with the right to exercise a certain contract and right to hedge, so it is not obligatory in nature and it will not cause money for the investors in the bidding situation because in the bidding situation, the allotment is not certain.

Forward contract are always obligatory in nature and there a higher risk of counterparty default so they will have to be exercised, and they are not having a right like option contract and forward contract are completely obligatory nature so there will be a risk related to non allotment of the bidding contract and it would lead to loss related to future positions.

jeff jeffy answered 2 years ago

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